Equipment for small businesses
Inventory forms a crucial part of many small businesses’ assets. Proper handling and accounting of these are key to fair and accurate bookkeeping. This guide delves into the basics of inventory management, tailored specifically for small businesses adhering to the K2 framework. If you’re unfamiliar with what the K2 framework entails, it’s likely used by your business, as the K3 framework is for larger corporations or smaller businesses that choose to use it despite not being required.
Other equipment are normally expensed for the entire amount at once. Costs for equipment that are booked as assets arise instead by booking depreciation over a number of years. In the K2 accounting framework, which is used by most smaller companies, equipment is normally written off as a rule of thumb over a five-year period.
What is equipment?
In accounting, equipment refer to physical assets with a usage period exceeding three years and an acquisition value exceeding half a price base amount. Inventories are recorded as assets, distinguishing them from regular expenses.
Bookkeeping of equipment
Equipment with significant value and longer lifespan should be accounted for as assets rather than direct expenses. This means that the costs for these inventories arise through depreciation over several years, usually a five-year period according to the K2 accounting framework.
Depreciation of equipment
Depreciating equipment means that the cost is distributed over its useful life. This affects both the income statement and the balance sheet and is an important factor in financial planning and reporting. You can read more about this in our article about depreciation.
Examples of classifying equipment
An example is a company purchasing a computer for SEK 30,000. This computer should not be recorded as an expense but as an asset and depreciated over five years since SEK 30,000 is higher than half a price base amount.
If the company later buys a new monitor for the computer for SEK 7,500, it is recorded as a direct expense as a consumable inventory and not as an inventory asset.
Common Questions about Equipment
When assessing whether the value of a purchase exceeds half a price base amount or not, the entirety must be considered. So, if you have a purchase invoice with many different items, you cannot assess line by line or for the entire invoice, but must assess which items are functionally related.
For example, if you purchase computer equipment for a new workstation, you need to summarize all the items required to achieve the function you’re after. Other items on the same invoice that do not relate to the computer, such as printer paper, should not be included in the valuation of the equipment.
If your business is liable to VAT , VAT should not be included in the valuation of your equipment. If your business or organization is not liable to VAT , VAT is included in the acquisition value.
If you lease a car, you do not own it, and it is not an asset for which the company should make depreciation. However, a larger initial extra leasing fee is usually spread over the length of the leasing agreement.
Proper handling and accounting of equipment are crucial for small businesses. It contributes to more accurate and fair financial reporting, which is necessary for both internal governance and compliance with tax legislation.