Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Introduction to Long-Lived Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 10
Created by Boundless

Accounting Perspectives on Long-Lived Assets

All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.

Learning Objective

  • Distinguish between the capitalized and expensed costs of an asset

Key Points

    • Figuring the cost of an item takes into consideration more than just the purchase price.
    • Examples that are excluded from the asset are expense, rather than capital costs.
    • If accounting principles allow recognition of an asset, the next issue is which items can be included, and which items need to be expensed.

Term

  • Capital Costs

    Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. Put simply, it is the total cost needed to bring a project to a commercially operable status.

Full Text

Asset Recognition

If accounting principles allow recognition of an asset, the next issue concerns which items can be included and which items need to be expensed. The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.

Asset Recognition

Items spent to get the asset up and running is capitalized as part as the cost of the asset.

Capital Costs

Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike. If the firm's own personnel are involved with installing the machine, their wage expenses can be allocated to the machine as well.

Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.

Figuring the cost of an item takes into consideration more than just the purchase price. Added to that would be any taxes paid, less any discounts received, cost of transportation that a company pays to bring the item to where it needs to go, and the cost of getting it ready for use.

So, for example, the cost of land would include any attorney fees, real estate fees, title fees, back taxes that need to be paid, and the cost of preparation for the lands intended use.

Buildings also have additional costs such as legal fees and remodeling fees to prepare it for use. The same goes for natural resources. Basically any costs that are necessary to get an item or land ready to use for business is included in the cost of the item.

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