Flame proof light

flame proof light should be considered as Consumable item (revenue expenditure) or Fixed assets (Cap ex)
cost of each unit is 8000/
Replies (7)
Quick Summary
This discussion explores whether flameproof lights, costing £8000 each, should be treated as a consumable expense or a capital asset. The decision hinges on accounting principles like the matching concept and materiality. Generally, if the lights are significant additions to PPE, directly used in production, or not mere replacements, they can be capitalised. Costs for day-to-day operations or replacements are typically expensed, but significant new installations, especially in production, can be added to the carrying amount. Lights for external areas like parking are usually expensed.

Some expenses such as power, lighting and heating may not be solely applicable to factory overheads, hence they are apportioned between factory, S & A expenses. Usually they are apportioned based upon n the floor area. Such purchase of lamps will be capitalised depends if they are directly used in production or maintenance or administration. 

If the value is significant and these lights are not replacements, then it can be capitalized.

It must be correct because they act as additions to ppe

As 10 suggests otherwise. Day to day operations costs are expensed. Replacement costs are capitalised. Considering the legal reality, lighting fixtures in the production plant are capitalised under site preparation.. now you purchased additional lights... Subsequent costs doesn't meet the criteria. But they can be treated as additions and included in carrying amount. They can also be considered as replacements and capitalised. 

Subsequently, if the lights are for outside the production line, eg., Parking space, it is an expenditure. 

The basic principle on which all accounting standards are framed for capitalization is the matching concept. 

Where the value of material is being matched with the revenue of multiple years then it is to be capitalized other wise not. That is why Plant & machinery is capitalised.

The second concept which needs to be checked after fulfilling matching concept it the immateriality concept. If the material fulfills matching to various FY but is not material then it should not be capitalised.

These are very grass roots concepts/principles on which all accounting standards be it Indian GAAPS, IFRS or US GAAPS are based. There may be variations in different accounting standards but they do not violate the principles.

All underlying accounting principles and costing principles are the same. Consider it like this as well direct costs are capitalised and indirect costs expenses. While abc costing technique allocates indirects costs into direct coats, it's just an evaluation to find out resource and overhead consumption per activity. Similarly, marginal costing is used for evaluation to derive internal profits eliminating indirect expenses, but every cost is absorbed into financial statements. However, eleigibility of capitalisation is based on direct costing and cost classification. 

All underlying accounting principles and costing principles are the same. Consider it like this as well direct costs are capitalised and indirect costs expenses. While abc costing technique allocates indirects costs into direct coats, it's just an evaluation to find out resource and overhead consumption per activity. Similarly, marginal costing is used for evaluation to derive internal profits eliminating indirect expenses, but every cost is absorbed into financial statements. However, eleigibility of capitalisation is based on direct costing and cost classification. 

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