Balancing Allowance Definition
A balancing allowance is granted when an asset is disposed of, and the proceeds from the disposal are less than the asset’s written-down value. This tax allowance compensates for the remaining value of an asset not yet recovered through depreciation deductions.
Key Concepts:
- Written-Down Value (WDV): The net book value of an asset after accounting for depreciation.
- Proceeds on Disposal: The total amount received from the disposal of an asset.
- Balancing Charge: An amount added back to taxable income if the proceeds from disposal exceed the written-down value.
Examples
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Example 1:
- Written-Down Value of Asset: £23,000
- Disposal Proceeds: £15,000
- Balancing Allowance: £23,000 - £15,000 = £8,000
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Example 2:
- Written-Down Value of Equipment: £30,000
- Disposal Proceeds: £25,000
- Balancing Allowance: £30,000 - £25,000 = £5,000
Frequently Asked Questions (FAQs)
Q1: What triggers a balancing allowance?
- A: A balancing allowance is triggered when the proceeds from disposing of an asset are less than its written-down value.
Q2: Is a balancing allowance beneficial for tax purposes?
- A: Yes, a balancing allowance can reduce taxable income, providing a tax benefit to the business.
Q3: How is the balancing allowance calculated?
- A: It is calculated by subtracting the disposal proceeds from the written-down value of the asset.
Q4: Can balancing allowance apply to all types of assets?
- A: Typically, it applies to depreciable assets such as machinery, buildings, and vehicles.
Related Terms with Definitions
- Balancing Charge: A charge added to taxable income when an asset’s disposal proceeds exceed its written-down value.
- Depreciation: The systematic reduction of an asset’s recorded value over its useful life.
- Written-Down Value (WDV): The value of an asset after accounting for depreciation.
Online References
- Investopedia: Understanding Balancing Allowance
- HM Revenue & Customs Guidance on Asset Disposal
- AccountingCoach: Depreciation Methods
Suggested Books for Further Studies
- “Intermediate Financial Accounting” by Thomas H. Beechy and Joan E. D. Conrod
- “Financial and Managerial Accounting” by Jan Williams, Susan Haka, Mark Bettner, and Joseph Carcello
- “Accounting for Dummies” by John A. Tracy
Accounting Basics: “Balancing Allowance” Fundamentals Quiz
### What does a balancing allowance compensate for?
- [ ] The increase in the market value of the asset.
- [x] The reduction in value of the asset beyond depreciation.
- [ ] The cost of purchasing the asset.
- [ ] Neither of the items listed above.
> **Explanation:** A balancing allowance compensates for the reduction in the value of an asset beyond what has been accounted for through depreciation.
### When can a balancing allowance be claimed?
- [ ] When the asset’s disposal proceeds exceed its written-down value.
- [x] When the asset’s disposal proceeds are less than its written-down value.
- [ ] When the asset is revalued.
- [ ] Never, as it does not affect taxes.
> **Explanation:** A balancing allowance can be claimed when the asset's disposal proceeds are less than its written-down value.
### How is the written-down value of an asset determined?
- [ ] The original cost price is taken into consideration.
- [ ] Historical cost minus depreciation.
- [x] The net book value after accounting for all depreciation.
- [ ] The appraisal value provided by an expert.
> **Explanation:** The written-down value is determined by accounting for depreciation, indicating the net book value of the asset.
### What is the written-down value of an asset if its original cost was £50,000 and £30,000 in depreciation has been taken?
- [ ] £50,000
- [ ] £30,000
- [ ] £20,000
- [x] £15,000
> **Explanation:** The written-down value would be £50,000 (original cost) - £30,000 (depreciation) = £20,000.
### Which of the following would typically result in a balancing allowance?
- [x] The disposal of an old machine for less than its written-down value.
- [ ] Acquiring a new asset at a discounted price.
- [ ] The market value of a building increasing.
- [ ] Receiving an insurance payout for an asset.
> **Explanation:** Disposing of an old machine for less than its written-down value would typically result in a balancing allowance.
### What is the condition for not claiming a balancing allowance?
- [ ] The asset is used for personal purposes.
- [x] Disposal proceeds exceed written-down value.
- [ ] Depreciation has not been accounted for.
- [ ] The asset was purchased in the last financial year.
> **Explanation:** If the disposal proceeds exceed written-down value, a balancing allowance is not claimed; instead, a balancing charge may apply.
### Which financial statement is affected by a balancing allowance?
- [x] Income Statement
- [ ] Balance Sheet
- [ ] Cash Flow Statement
- [ ] Statement of Retained Earnings
> **Explanation:** A balancing allowance affects the Income Statement as it reduces taxable profit.
### Does a balancing allowance affect taxable income?
- [x] Yes, it reduces taxable income.
- [ ] No, it only affects the balance sheet.
- [ ] It increases taxable income.
- [ ] It has no effect on taxable income.
> **Explanation:** A balancing allowance reduces taxable income, providing tax benefits.
### Who typically benefits most from claiming a balancing allowance?
- [ ] Independent contractors.
- [x] Businesses disposing of depreciable assets.
- [ ] Consumers buying second-hand goods.
- [ ] Government agencies.
> **Explanation:** Businesses disposing of depreciable assets benefit most from claiming a balancing allowance as it reduces their taxable income.
### What happens if the proceeds from disposing an asset are the same as its written-down value?
- [ ] A balancing allowance is claimed.
- [ ] A balancing charge is claimed.
- [x] Neither a balancing allowance nor a balancing charge occurs.
- [ ] Depreciation is recalculated.
> **Explanation:** If the proceeds are the same as the written-down value, neither a balancing allowance nor a balancing charge occurs.
By studying the comprehensive definition, examples, FAQ, and related quizzes, you’ll thoroughly understand balancing allowances, enhancing your financial literacy. Continue exploring to master the subtleties of business accounting!
