There is no one single Xero account code that should be used to record any outgoing that relates to computers. This is because computer expenses come in all shapes and sizes. The type of computer expense will determine which Xero account code is the correct code to use in each circumstance.
In this article, we will discuss the different types of computer expense and identify an appropriate Xero account code to use for each.
Types of computer expenses
The term ‘computer expenses’ is very broad. It could contain any business expense transaction which involves a computer, notebook or tablet in one form or another.
Some examples of computer expenses are:
- Computer equipment
- Computer software
- Computer repairs
- Computer consumables
- Web hosting costs
- Email service costs
- Website design costs
- Broadband costs
Why does it matter how I record computer expenses in Xero?
It is very important that computer expenses are recorded accurately in your business accounts in order to ensure that the nature of the expense is reflected in the reports and, eventually, in the tax return.
Most computer related costs that you come across during the life of your business will be recorded as an expense and will therefore show up as a reduction to the business profit.
However, it is still important to ensure that an appropriate Xero expense account code is allocated.
From time to time, it is likely that your business will also buy computer related expenses that would be more appropriately recorded as a ‘fixed asset’ in Xero…
What is a fixed asset?
A ‘fixed asset’ can be thought of as something bought (and owned) by the business of value, which is expected to bring future economic benefit to the business – normally over the course of a number of years. It does not include inventory (stock) that is bought by the business that is intended for resale.
When considering computer expenses, an example of a fixed asset could be a computer purchased by the business which will be used by staff over a number of years.
The difference in presentation between a fixed asset and an expense is that a fixed asset is included on the balance sheet report (which is a statement of position), rather than in the profit and loss account (which is a statement of performance).
Fixed assets do indirectly show, in part, within the profit & loss report, through depreciation (the writing off of the fixed asset’s value to a depreciation expense code over a number of years) – although depreciation will not be considered in this article.
Therefore, when we record computer equipment as a fixed asset within Xero, we are saying that this item has increased the value of the business (at least for the short-to-medium term) rather than reduced it’s value.
Which Xero account should I use for computer equipment?
Following on from the discussion above regarding fixed assets, we are not saying that all computer equipment should be recorded as a fixed asset – and this is where the ambiguity often lies.
In order to be a legitimate fixed asset, the computer equipment must pass the ‘bring future economic benefits’ test.
Let’s take a notebook computer as an example. It will be hoped by the business owner that the computer will be of use to the business for a number of years. Therefore, in a perfect world, the notebook computer would be recorded as a fixed asset within Xero.
However, you may have been told by your accountant that it is not worth ‘capitalising’ such items as a fixed asset, unless their value is over a certain threshold (e.g. a cost price of £500).
The reason for this is that when an item is added as a fixed asset, then additional work is required to administer a ‘fixed asset register’ and calculate and record a depreciation write off over a number of years. Therefore, the cost to administer the actual work involved becomes a consideration when deciding whether it is worth recording an item as a fixed asset.
It should be noted that there is no official minimum value threshold that applies when deciding on whether to capitalise computer equipment (and in fact any other item) as a fixed asset.
We recommend that you talk to your accountant to find out if she/he has a preference on minimum cost for a new fixed asset item.
Once you have decided on a minimum value for new fixed assets in Xero, you can apply that to all equipment purchases.
Use one of the following Xero account codes, depending on your decision:
– Xero Code 720 – Computer Equipment – if you decide that the item is a fixed asset.
– Xero Code 763 – IT Software & Consumables (or create a more appropriately names expense overhead code) – if you decide that the item is an exense that should be wholly written off during the year.
Which Xero account should I use for computer software?
Generally, short-term computer software licenses should be recorded using the Xero Code 763 – IT Software & Consumables. Examples of such items include Canva, Adobe Creative Cloud, Xenon Connect and even Xero itself.
However, if the software has a license with a long lifetime and will provide economic benefit into the future, then on some occasions it may be more appropriate to capitalise the software as an ‘Intangible Fixed Asset’ (using the Xero Code 770) or even Xero Code 720 – Computer Equipment.
Again, your accountant may have their own minimum value cost threshold in mind, so it is worth asking them so that you are carrying out your Xero bookkeeping in line with the accounting policies used by your own accountant.
Which Xero account should I use for computer repairs?
Repairs of computer equipment examples could include the replacement of a CPU, graphics card, LCD screen etc.
The repair and maintenance of computer equipment could be recorded within Xero Account Code 473 – Repairs and Maintenance, or Xero Account Code 763 – IT Software & Consumables.
What is of most importance is that the item is recorded as an expense in the profit and loss report (which it will if applying one of the above 2 account codes).
However, there is a caveat that if the item being repaired significantly improves the piece of computer equipment when compared to it’s orginal ‘bought’ state, then the purchase may be better recorded as a fixed asset – following the same fixed asset considerations in the sections above.
Which Xero account should I use for computer consumables?
Examples of computer consumables include printer ink, screen wipes, mouse mats, printing paper etc.
Consumables, by their nature, are used by the computer equipment, rather than being computer equipment themselves.
Therefore, an appropriate Xero code to use is 763 – IT Software & Consumables.
Which Xero account should I use for web hosting costs?
There is no dedicated account code in Xero’s chart of accounts for web hosting costs.
Many users use the Xero Code 400 – Advertising & Marketing.
However, you may wish to create a new overhead expense code called “Website Hosting Costs”.
Note: if you have bought your own physical web hosting server, then it may be better recorded as a fixed asset (see sections above).
Which Xero account should I use for email service costs?
Similarly to the section above, many Xero users use the Account Code 400 – Advertising & Marketing when recording email hosting and service costs.
Or perhaps rename the newly created “Website Hosting Costs” account to “Website & Email Hosting Costs”.
Which Xero account should I use for website design costs?
The Xero account code given to website design costs will depend on the nature of the website.
Will the website bring future economic benefit to your business? Does the cost of the website pass your accountant’s low value fixed asset threshold? If so, then Xero Code 770 – Intangible Fixed Asset may be appropriate.
If the website design expenditure is small or immaterial, then you could create a new overhead expense account in Xero called “Website Design Costs”, or alternatively, you could instead use Xero Code 400 – Advertising & Marketing.
Which Xero account should I use for broadband costs?
Internet connectivity and broadband costs can be appropriately categorised within the 489 – Telephone & Internet Xero code.
Can Xero help me to detect computer expenses that have been recorded incorrectly?
The main inaccuracies relating to computer expenses that occur in Xero, and any other bookkeeping package, are:
1. recording small incidental computer accessories within a fixed asset code, instead of using an expense code
2. recording large/significant pieces of computer equipment within a profit and loss expense code (e.g. 763 – IT Software & Consumables)
The good news is that we have built a Xero integrated cloud platform, called Xenon Connect, which constantly monitors your business’ fixed asset codes and expense codes to check that everything appears correct.
For example, our Low Cost Fixed Assets data check feature flags up any low value items that have been recorded using a fixed asset code – with the threshold being adjustable depending on your business’ preference.
Also, our Capital Item Review data check feature detects any large value items that have been allocated to an expense code – which may be more appropriately recorded using a fixed asset code. The threshold for each expense code being monitored can be adjusted.
Take a free 14 day trial today to take a look around.
How can Xero help me to ensure that I allocate the correct computer account code consistently to a purchase?
To check that you have consistently recorded computer expenses correctly, you could manually review your Xero contact and trial balance reports in Xero.
However, if you want to be notified when you (or one of your team members) has allocated a purchase to an unexpected expense or fixed asset code, then our Unexpected Account Code Used bookkeeping data check will help.
Can I get corporation tax relief on computer expenses?
If the computer expense has been recorded within the profit and loss account as an expense, then it will naturally flow through to the tax return as a deductible expense – meaning that it will reduce the taxable profit and therefore will also reduce the corporation tax bill of the business.
If the computer expense has been recorded as a fixed asset (e.g. a new computer server or high value notebook computer) then it does naturally flow through to the tax return as a deductible expense as it does not reduce the accounting profit of the business (ignoring any depreciation).
However, the Annual Investment Allowance can be claimed in respect of computer equipment purchased by the company that has been capitalised as a fixed asset in the accounts – subject to the maximum annual limit applicable during the tax year of purchase.
Therefore, in short, generally all computer expenditure reduces the company’s taxable profit and corporation tax bill. However, if you are in doubt regarding the tax treatment of your computer purchases, then it will be worth talking to your accountant.
