Owning or hiring plant: how each shows in the books
How owned plant and hired plant show differently in a contractor's books, monthly figures and budgets, and what happens when a machine is sold.
By Achekam · · 5 min read · For Construction businesses in South Africa, Nigeria, Kenya
Every growing contractor reaches the same question about its most-used machine. The backhoe loader has been on hire for most of the year; would it be cheaper to buy one? The answer depends on how often the machine works, what it costs to keep running and how it would be paid for. But part of the answer is also how the decision will look in the books, to the owner, the bank and anyone pricing the next tender.
Hired and owned plant appear in quite different places in a contractor's figures. This article explains where each goes in Achekam, how to compare them fairly month by month, and what happens when an owned machine is eventually sold.
Hire invoices as a running cost of the job
Hired plant is the simple case. The hire company sends an invoice, usually monthly or at the end of each hire, and you record it as a supplier bill, line by line with VAT. A bill without a purchase order waits for approval before it posts, which is a useful check that the hire was ordered and the hours are right. You can pay it in full or in parts from a chosen bank account.
The cost lands in an expense account. Which one is up to you: a contractor's chart of accounts usually has a plant hire account among its direct costs, so hire sits with materials, labour and subcontractors above the gross profit line. Achekam's standard chart can be extended with accounts like this, and existing accounts can be renamed or switched off.
Hire is easy to read. When the machine works, you pay; when it is off-hired, the cost stops.
Owned machines on the fixed-asset register at cost
Owned plant goes onto the fixed-asset register. A business adds each asset at cost, which for a machine usually means the purchase price plus delivery and the costs of getting it ready to work, and leaves out finance charges and routine running costs. The IFRS Foundation's summary of IAS 16 Property, Plant and Equipment sets out the principles for recognising such assets, measuring their carrying amount and working out depreciation and impairment, and your accountant will apply it to decide what goes into cost.
The fixed-asset register is not part of Business Essentials, so check your plan before you rely on it.
Monthly depreciation by straight line or reducing balance
Once a machine is on the register, Achekam depreciates it monthly, by straight line or reducing balance, and posts a journal each month. The choice of method is an accounting judgement:
- Straight line spreads the cost evenly over the useful life. It suits machines that work at a steady rate for years.
- Reducing balance charges more in the early years and less later. It suits machines that lose value fast and need more repairs as they age.
A worked example in words: a contractor buys a used tipper and adds it to the register at its full cost, including delivery and new tyres fitted before it started work. Every month the register posts depreciation, so the cost moves gradually from the balance sheet to the income statement. The tipper's own fuel, tyres and repairs are recorded separately as they happen, through supplier bills, and do not change its cost on the register.
Comparing the two in management accounts and against budget
Management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end, both added up from your own journals. Here is where owned and hired plant look different:
| Hired plant | Owned plant | |
|---|---|---|
| Where the cost shows | Plant hire, as each invoice is posted | Depreciation each month, plus running costs as they occur |
| Balance sheet | Nothing, apart from unpaid hire bills | The machine's cost less depreciation to date |
| Finance | None | Interest on any loan, in finance costs |
| When the machine stands idle | Off-hire it and the cost stops | Depreciation and finance carry on |
A fair comparison adds up everything the owned machine costs in a month (depreciation, fuel, repairs, insurance, finance and the operator if you would otherwise hire one with the machine) and sets it against the hire invoices for the same work. Budgets help here: a business can set a budget per account and period and compare it with actual figures from its ledger. Budget plant hire and own plant running costs as separate lines and watch them month by month.
Utilisation matters most. An owned machine that works every week is often cheaper than hire. One that stands in the yard for months is not, however good the purchase price was.
Selling a machine: the profit or loss on disposal
Owned plant is eventually sold, traded in or scrapped. On the register, a business disposes of the asset, and the profit or loss is posted. If the machine sells for more than its value on the register, a profit is posted; if for less, a loss. Large profits on disposal are a sign that depreciation was set too fast; large losses that it was too slow. Either is worth a conversation with your accountant about the rates you use for the rest of the fleet. Transport companies face the same judgement with trucks; fleet depreciation looks at it from their side.
Tax allowances that stay with your tax adviser
The register does not work out tax wear-and-tear or capital allowances. Each country sets its own allowances for plant and machinery, and they rarely match the depreciation in your accounts. Give your tax adviser the register at year end, with dates of purchase and disposal, and let them work out the tax figures separately.
Making the decision
Before buying, list the machine's expected working months, its likely running costs and its finance cost, and compare them with a year of hire invoices. Then think about how the purchase will look to the bank, which figures a contractor can give the bank covers, and make sure your chart has the accounts to show both kinds of plant clearly, as suggested in a chart of accounts for a building contractor.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
