The simple answer is to use the stock item type ‘Asset Order Item’ when raising a purchase order or processing a purchase (supplier) invoice for an Asset, but this begs the question: What is an asset?

Purchase of an Asset is often referrred to as ‘Capital Expenditure’ (abbrieviated to ‘CapEx’) and there are a number of ways of defining this including a number of tests devised by HM Revenue and Customs, and a number of International Accounting Standards (notably IAS 16, 22, and 38), which aim to deal with the accounting treatment, but in simple terms Assets are items that:

• are held for use in the production or supply of goods or services, including for rental to others; and
• are expected to be used during more than one year.

The cost of such items is taken into the Balance Sheet and then a proportion of that cost written off each month or year against profits as ‘depreciation’.

Often whether an item is an Asset is obvious, for example machines that are used in production or offices, including computers, or vehicles that are used to carry goods, but what of hand tools and other small value items?

It is generally accepted that low value items, and most particularly those which will not last in use beyond a year, are treated as a ‘minor capital’ expense (Consumable Item) rather than an Asset – in accounting jargon they are treated as ‘revenue’ (an expense) rather than ‘capital’ (an asset) expenditure.

Having said that take great care about hire purchase, lease, and rental arrangements: generally if you are using finance to purchase an Asset then the item needs to be treated as such, and the finance treated as a loan to be repaid, but if an item is rented then it should not be treated as an Asset but rather the rental invoices from the supplier will simply be treated as an expense.

For more information on creating Asset Items, visit our guide to creating Asset Items.