This strengthens your balance sheet position and means the cost is set against your profit over a number of years rather than all at once. A fixed asset is something which a business purchases for long term use to generate income rather than to sell onto customers. For example, a manufacturing business buys equipment to make its product which it sells onto customers. The equipment is a fixed asset of the business. Fixed assets have a useful life to a business.
Useful life means the period of time an asset is used breaking, becoming obsolete or needing replacement. This is an accounting adjustment called amortisation a type of depreciation.
Websites that offer general information about a business are not classed as a fixed asset. You need to decide if your website is more of a brochure that publicises your brand, or if the purpose of your website is to sell goods. The entire website development goes on your profit and loss statement.
To show this progress you have to add up all the sources of revenue and the subtract all the expenses related to that revenue. To illustrate, Adam owns a greengrocers. The taxman is happy and so is Adam. If the purpose of your website is for customers to buy things through it and to make a profit on those items, then the tax treatment of your website development gets a little bit more complicated. You can no longer simply stick your website development unde r profit and loss.
Now at least part of it needs to go on the balance sheet. This means you should always take professional advice when making any decisions relating to the accounts of your business. A fixed asset is something in your business that you purchase to help you generate income. Office equipment, a vehicle, or a machine are all common examples.
Fixed assets typically have a useable life after which they fail or become obsolete and need to be replaced. Instead, you put it on your balance sheet. Then, over the usable life of the asset, you record its depreciation, effectively spreading the cost of purchasing the asset over several years rather than one. So, can you treat your website as a fixed asset?
The following has to apply to be recognized and recorded as an asset;. An intangible asset like a website meets those criteria. The initial cost of an asset includes everything to get it to the point where it is used as intended.
In the case of a website, it includes all the web and software development, graphical design and content development cost. All of these costs are capitalized, but the operational cost like the cost of hosting, on-going maintenance and annual domain renewal fees are expenses incurred. Usually, the costs incurred during the planning and research phase of website development are expensed and not capitalized.
For more on why this is the case, you can read more on, SIC interpretation notes for Intangible assets — Website Costs.
The rules might differ slightly from country to country, and it can get a bit technical when it comes to what is allowed to be capitalized and what is not. If you are still not sure whether your website is an Intangible Asset, then ask yourself this: Is my website an economic benefit to my business?
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