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capitalisation

Priyanka Bajoria (article assistant) (26 Points)

11 November 2009

An UPS costing Rs 12 lacs is capitalised as per Companies Act. The same needs a replacement of battery costing RS 2.5 lac after every two years. should the replacement cost of battery be capitalised or treated as a revenue expenditure.

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8 Replies

triumph-CMA (Chartered Accountant) (508 Points)
Replied 11 November 2009

Replacement of battery does not increase the capacity or performance of UPS hence it must be treated as revenue and not to be capitalised.

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Satish (CA Final Student) (479 Points)
Replied 11 November 2009

agree with Dhirendra singh

Priyanka Bajoria (article assistant) (26 Points)
Replied 12 November 2009

We capitalise or revenue for giving a true and fair view of the books of accounts. in this case should "Substance over Form" be taken into account as UPS is nothing but primarily a battery!! even if I remove the UPS the machine will work. So if I repalce the battery ie primarily the UPS, the effeciency of my machine will improve in comparision to the old battery in the UPS!!

CA Vasudha (CA) (47 Points)
Replied 12 November 2009

i think Mr. Dhirendra Singh is correct, we should charge it to P& L AC

CA Parth Shah (Chartered Accountant) (369 Points)
Replied 12 November 2009

hey priyanka..

u r trying to convience urself in a wrong way...

If we look at the nature of expense,it is regarded as Repairs and Maintainance as it requires the replacement at regular interval.So u cant capitalize the same.

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CA Parth Shah (Chartered Accountant) (369 Points)
Replied 12 November 2009

hey priyanka..

u r trying to convience urself in a wrong way...

If we look at the nature of expense,it is regarded as Repairs and Maintainance as it requires the replacement at regular interval.So u cant capitalize the same.

Vaibhav (CA IPCC Student) (34 Points)
Replied 28 November 2010

Dear Priyanka,

You're mistaken with the accounting fundamentals. "Substance over form" is not applicable here. You actually meant "Materiality". "Substance over form" means the actual fact rather than the legal form.

Eg- In Hire purchase, the HP buyer records asset in his books, though he is NOT the LEGAL OWNER. This is the case where possession is given more importance than what the actual legal position is.

Regards,

Vaibhav Arora.

Suresh Prasad (www.aubsp.com) (15630 Points)
Replied 29 November 2010

Even if UPS needs a replacement of battery costing RS 2.5 lac after every two years but Replacement of battery does not increase the capacity or performance of UPS, hence it must be treated as revenue and not to be capitalised.