In Fixed asset reserve, two specific fixed asset transactions types are described: and . You can set up an account in the form for .
Profit on
sold fixed assets can be handled in two ways, basic and
advanced
The basic option is to post both the sales price and the net book value to a profit and loss account to recognize the profit on the fixed asset - which is the difference between the sales price and the net book value - on a profit account in the year of the sale. This option does not require any specific setup. The fixed asset transactions will be posted according to the setup of the accounts for disposal.
Example
|
Sales price of the fixed asset |
10,000 |
|
Net book value |
- 6,000 |
|
Profit |
4,000 |
|
Profit and loss statement |
Balance sheet |
|
|---|---|---|
|
Assets |
Liabilities |
|
|
Account for profit on sold fixed assets |
Bank account |
|
|
Credit 4,000 |
Debit 4,000 |
The advanced option is used in countries/regions where the tax legislation allows you to postpone the taxation of the profit on fixed assets. This option uses the functionality of reserves. Instead of posting on a profit and loss account, the profit on the fixed asset is posted to the balance sheet as a liability.
Example
For the same disposal transaction, the profit will be handled as a balance sheet transaction.
|
Profit and loss statement |
Balance sheet |
|
|---|---|---|
|
Assets |
Liabilities |
|
|
Bank account |
Provision for reserves |
|
|
Debit 4,000 |
Credit 4,000 |
Not all profits on fixed assets can be handled as reserves. Usually the local legislation requires that only taxation of profits on fixed assets that have been owned by the company for a certain period of time can be postponed by using the reserve option.
The local legislation usually defines how long a reserve can exist. Eventually, each reserve must be dissolved. Depending on whether the reserve is dissolved within or after the legal deadline for reserve dissolution, one of following dissolution options is used.
Option 1 - The reserve is dissolved within the deadline
If a new fixed asset is acquired as replacement for the old asset, the reserve can be posted as reduction of the acquisition price of the new fixed asset. In this case the former profit will not be recognized at once as one amount in the chart of accounts, but in increments. Because of the reduction of the acquisition price, the depreciation amounts for the new fixed asset will be smaller and the net income of the company will be bigger.
Example
|
Profit and loss statement |
Balance sheet |
|
|---|---|---|
|
Assets |
Liabilities |
|
|
|
|
|
|
Credit 4,000 |
Debit 4,000 |
Option 2 - The reserve is dissolved after the deadline
If no fixed asset has been acquired within the legal deadline, the reserve has to be transferred into the profit and loss statement.
Example
|
Profit and loss statement |
Balance sheet |
|
|---|---|---|
|
Assets |
Liabilities |
|
|
|
|
|
|
Credit 4,000 |
Debit 4,000 |
Enter the legal requirements in in the fields and to monitor the deadlines for reserve dissolution.
