What is an Asset?
In the broadest terms, an asset is something that is:
- Owned / controlled by the company.
- Going to last for more than 1 year.
- Intended to be used in the company to generate more income.
For example, a telephone used to make business calls, or a tool for your work such as a laptop, would qualify.
Why would I want to bring an item into the company as an asset?
One of the best ways to explain how assets affect your business is to compare the typical effect of an expense and an asset:
- Reduces profit by the value of the expense
- Which reduces your tax bill by 20%
- Because your profit has been reduced, the amount of dividend you can take out of the company is reduced (dividends are based on your companys profits after tax)
- Does not reduce profit (for that year)
- But still immediately reduces your tax bill by 20% of the value of the asset
- This means the dividend amount available is increased for that year.
- But you will have a lower dividend amount in the coming years: its a bit like spreading the cost!
In summary, assets are usually a good deal for you: you can reduce your tax bill while simultaneously increasing the amount of money you can take out of the company. However, be warned because the dividend amount you can take will be reduced over the coming years.
In Xero, the rate of reduction, or depreciation is the period over which the asset is reduced to zero value. All assets are currently set to have a lifespan of 4 years.