Journal entries for asset purchase less than R7000

[deweyzeph]

Hi there

I have my own limited company and I have just bought a printer for R2500. This is my first asset purchase through my limited company so I'm not too sure what to do. I am aware that SARS allows you to write this off in the year of purchase as a wear and tear allowance because the purchase amount is less than R7000. However I am unsure of how to handle this in my accounting software. Do I create a non-current asset account for this purchase and then debit my wear and tear expense account or can I create an expense account just for the printer and expense it immediately? Please could someone enlighten me as to what the relevant journal entries would be to immediately write off an asset purchase of less than R7000?

Any help would be much appreciated.

[Dave A]

Do I create a non-current asset account for this purchase and then debit my wear and tear expense account

I believe that is the correct way to do it.

However

or can I create an expense account just for the printer and expense it immediately?

I confess that's how I do it in my management accounts. In my instance there are quite a few of these sorts of purchases in a year, so I've created a separate expense account for them (in my case I've called it Expensed Equipment) and expense these items to it directly. This way it's still easy to identify these assets that have been purchased for the purposes of the end-of-financial-year compilation, and to update and maintain the company Asset Register.

[deweyzeph]

I believe that is the correct way to do it.

However

I confess that's how I do it in my management accounts. In my instance there are quite a few of these sorts of purchases in a year, so I've created a separate expense account for them (in my case I've called it Expensed Equipment) and expense these items to it directly. This way it's still easy to identify these assets that have been purchased for the purposes of the end-of-financial-year compilation, and to update and maintain the company Asset Register.

Thanks Dave. I actually dusted off my old Accounting 101 textbook from university and had a look. The correct way to treat this is:

Dr Office Equipment R2500
Cr Bank Account R2500

Dr Wear & Tear Expense R2500
Cr Accumulated Wear & Tear R2500

The accumulated wear & tear account is a contra non-current asset account, or in other words a negative fixed asset. That way the asset still sits on your balance sheet.

The only thing I'm not too sure of is the timing of the second transaction. Can you allocate the wear and tear immediately as soon as you've bought the asset or wait until the end of the financial year? I guess it doesn't really matter if you're allowed to expense 100% of the wear & tear in the current financial year.

[Dave A]

Yeah, and thinking about it maybe I should change my ways.

Unfortunately, strictly speaking it gets worse than what you have posted above.

Despite the allowance to expense 100% of the value in year one, this is for tax purposes only - one should still depreciate the asset over the useful life of the asset. The 100% allowance deduction should only applied to the tax computation. This gets further complicated with a deferred tax entry too - typically 28%* of the depreciation allowance portion not as yet claimed per the financial statements.

*based on current tax rates.

[deweyzeph]

Yeah, and thinking about it maybe I should change my ways.

Unfortunately, strictly speaking it gets worse than what you have posted above.

Despite the allowance to expense 100% of the value in year one, this is for tax purposes only - one should still depreciate the asset over the useful life of the asset. The 100% allowance deduction should only applied to the tax computation. This gets further complicated with a deferred tax entry too - typically 28%* of the depreciation allowance portion not as yet claimed per the financial statements.

*based on current tax rates.

That's why it's useful to keep the journal entries for depreciation and wear & tear in separate contra asset accounts instead of crediting the asset account directly. At least then when it comes time for your financial statements to be drawn up your accountant can clearly see the difference between depreciation and the wear & tear allowance. It probably doesn't really matter for something small like an office printer, but a large fixed asset like a car or building would certainly be a very different beast.