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Expense capitalisation.?

RAHUL (Student) (206 Points)

29 June 2020

How to determine whether a particular expense has to be capitalised or not.?

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CA ABHAY GUPTA (Practice) (3230 Points)
Replied 29 June 2020

The particular item which increase efficiency after installing it needs to be capitalized else to be debited to profit and loss account.. eg in a car if 800 cc engine replace with 1200 cc is need to be capitalized, if tyre get repaired or changed or new seat cover fitted these needs to be treated as an expense as installing engine increase car acceleration and efficiency while there will be no change while doing later one..
in case of machinery if any parts change which increase production or another factor which before replacing not provided by machine or provided but not more efficiently after replacement then cost needs to be capitalized else booked as an expense

SUSHIL PANCHAL (25 Points)
Replied 29 June 2020

If such exp incurred before put to use of an asset..
or efficiency or capacity of asset will increased by incurring such exp. ( Machinery Capacity to Produce goods. - 10000 Units )
but due to incurred such exp on machine the original capacity increases by 500 i.e. 10000+500 , such exp capitalized

Arnav Mane (7 Points)
Replied 29 June 2020

1. if an expense is incurred on a recurring basis (frequently) and which does not results in creation of an asset or an increase in the life of an asset such expenditures should not be capitalized.
eg. Regular repairs to a machinery.
2. similarly if an expenditure is ncurred on a non recurring basis (not frequently, once in a while) and which results in creation of an asset or enhancement of life of an asset such expenditures should be capitalized.
eg. addition of a part to a machinery that may increase the production capacity of machinery or increase the life of machinery.
3. further if an expenditure is incurred prior to incorporation of the business should be capitalized.
eg. freight incurred in bringing the machinery to factory place. sheds built for labours.
4. those expenditures which are incurred in order to put an asset to function shall also be capitalized in cost of an asset.
eg.wages paid for installation of the machinery

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