Five steps to account for capital gains tax correctly in your company books
Recently, I told you when a transaction has a capital gains tax (CGT) implication and how to calculate it correctly.
Today, I'm going to show you how to account for the disposal of an asset correctly.
If you get this wrong, you'll have incorrect financial statements. And you won't calculate your income tax correctly either.
Read on to find out how to account for the disposal of an asset.
How to account for the disposal of Property, Plant and Equipment (PPE)
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As the bookkeeper, you should disclose the disposal separately on your financial statements. Add a note that breaks down the additions and disposals during the financial year.
Always keep the fixed asset register up-to-date. And record all additions and disposals in both the financial records and fixed asset register.
This will help you when calculating the income tax returns and preparing your financial statements.
Read on to find out five steps you should use when disposing of an asset.
Follow these five steps to correctly account for the disposal of an asset
Step #1: Journal entry – profit and loss
DR Profit or loss of asset
CR Cost of asset
Remove the asset out of the asset account in the balance sheet and transfer the cost to the income statement.
Step #2: Journal entry - depreciation
DR Accumulated depreciation of asset
CR Profit or loss of asset
Remove the accumulated depreciation of the specific asset out of the balance sheet and transfer it to the income statement. The net effect will then be the book value accounted for in the income statement.
Step #3: Journal entry – debit the bank
DR Bank/Current asset
CR Profit or loss of asset
Account for the money you receive for the sale of the asset in the income statement. The net effect will either be a profit if the amount of money you receive is higher than the book value; or a loss if it's less than the book value.
Step #4: Update your fixed asset register
Remember to show the specific asset was sold on the fixed asset register. Don't delete the asset completely. Your fixed asset register is a register of all assets since inception of the business.
Step #5: Calculate your income tax
Now include the net profit you record in your income statement in your normal income tax calculation at an inclusion rate of 66.66%. This means capital gains will effectively be taxed at 18.66%.
But, if you have capital losses, roll these over to the following year against future capital profits. It's important to show these capital losses on your income tax return so you can use these capital losses in the future.
There you have it, now you know how to account for CGT
correctly, you can enjoy paying lower tax on capital profits.
Discover how to account for transactions correctly in your company books improve your cash flow and eliminate simple accounting mistakes here...
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