When a fixed asset is sold or written off, you need to calculate balancing allowance or balancing charge if capital allowance has been claimed for the asset previously.
Balancing allowance is tax deductible whereas Balancing charge is taxable income.
While computing a company’s Wear and Tear Allowance for a particular financial year, sometimes the WDV b/f exceeds the value of the asset disposed.
This difference is referred to as a balancing charge and the amount of balancing charge taxable is restricted to the total amount of capital allowance allowed previously in respect of the asset disposed.
On the contrary, should the value of the asset disposed be lower than the WDV b/f, then the surplus is used in the computation of the WTA and the amount added back as a Disallowable item in the Tax Computation.
Eddy – CPA, MBA