![]() ![]() Now let’s look at how we should record the cost of the new machine in our accounting records. Double-entry bookkeeping for acquisitions The revenue cost must be identified and posted to the appropriate account(s) in the general ledger so that it will be written off at the end of the year on the statement of profit or loss (SoPL) and only the capital expenditure, and any other directly attributable costs, are included as the cost of the non-current asset. We need to be really careful when analysing capital expenditure documents as often revenue expenditure is often made at the same time and therefore on the same invoice. When we apply them to the training and breakdown cover, we can reason that the machine will not be operational unless someone is initially trained to use it, however, it will be perfectly functional regardless of whether breakdown cover is in place or not.* The key to identifying which items of revenue expenditure can be capitalised and which cannot, is applying the words ‘directly attributable costs’. The answer is contained within IAS 16 Property, Plant and Equipment, which says that any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, can be capitalised. But how can two items of revenue expenditure be treated differently? Simple, right? Unfortunately not, it would be correct if the training and breakdown cover were not related to the new machine and is in fact correct for the breakdown cover. Therefore, looking at the three items of expenditure on the invoice, the machine is capital expenditure and the training and breakdown cover are revenue. Capital or revenue?Īs we are interested in the non-current asset cycle we first need to decide which items on the invoice are relevant to it, in other words, which are capital expenditure and which revenue.Įxpenditure on the purchase or improvement of non-current assets.Īll other expenditure incurred by a business that is not capital expenditure. There are a number of elements to the transaction that LMO has made so we’re going to look at each individually. We can also see that the supplier provided training on operating the new machine and cover against breakdowns. The invoice shows us that not only did LMO purchase a new machine but that the purchase price was reduced by a part-exchange allowance of £1,500 as an old machine must have been sold to Clever Engineering Solutions in part exchange for the new one. Here is the invoice for the machine LMO Ltd decided to buy at the end of its acquisition of non-current assets process: We also looked at the Standard’s fundamental accounting concepts and set objectives, with which organisations must be compliant. We discussed IAS 1 and how the application of materiality allows organisations to tailor accounting policies to make them appropriate for individual business needs. In part one we started looking at the cycle of buying, owning and disposing of non-current assets. The non-current assets cycle – acquisition, depreciation and disposal.Study Tips: Non-current assets cycle series The second article of our series on the non-current assets cycle. ![]()
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