Reinvesting income in assets

Good afternoon,

I hope everyone is well.

I have a tendency to consider hypotheticals long before I will ever need to use them but here goes; how would you treat non-current assets purchased directly from revenue income within the accounting system? Would it be necessary to take the money out of the business in the form of drawings/dividends, reintroduce as capital and then make a capital purchase? Or is it possible to treat this as profit not removed from the company and transfer the money to the capital account then to equipment at cost?

Sorry to head off at a slight tangent but when deciding whether an item of equipment should be capitalised, would you look solely at how long the item is likely to be used in a business or is there an approved/widely used ‘cut-off’ value below which it isn’t really worthwhile capitalising (e.g. I have a printer which cost £100 and will probably be used for 3 years, as the value is fairly low I can claim this as a sundry/office expense)?

Thank you in advance for your help!
Gary

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Answers

  • Gary1089Gary1089 Posts: 7Registered
    Thank you very much for your help. In creating this journal entry I assume the revenue figure for the year remains unchanged and it would instead simply be: credit the bank, debit the non-current asset cost account?

    With regards to capitalising assets, should a client wish to set a cut off point which we may consider significant, would you ever be inclined to advise them against that or continue working for them with their adopted policies? Part of the reason that this hypothetical came to mind is that I have a friend who has recently started up as a tree surgeon (private limited company) and their plan is to reinvest the first year’s revenue into various items of equipment; few I would imagine would cost large amounts of money (likely average purchase I would assume to be in the region of £100-200). If they were to do this would it be in breach of any laws or standards to record these all as a one off expense, effectively offsetting tax in the first year? On the assumption that moving forward there won’t be any depreciation charges for these assets in subsequent years.

    Thanks again.
    Gary
  • Gary1089Gary1089 Posts: 7Registered
    Thank you very much, you’ve been a great help!
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