Semester 1 Accounting For Managers: Amity International Business School
Semester 1 Accounting For Managers: Amity International Business School
Objective
Capital Expenditure
Expenditures for the acquisition of fixed assets and are recorded in the asset accounts Expenditures that extend the useful life, improve the quality of output, or reduce operating costs of an existing fixed asset beyond their originally estimated levels
Revenue Expenditures
Expenditures for ordinary repairs, maintenance, fuel, insurance or other items needed to maintain and use buildings, and plant and equipment They go to expense accounts and reduce the income of the period in which they incurred, because the benefits from these expenditures do not last beyond that period
Expenditure
A practical approach is to treat any expenditure that will benefit several accounting periods as a capital expenditure, and any expenditure that will benefit only the current accounting period as a revenue expenditure
Expenditure
Expenditures on additions and improvements to assets are treated as capital expenditures The construction of an additional floor in a building increases the capacity of an existing asset and should be capitalised
Expenditure
Additions or improvements to an existing asset, which become an integral part of the asset, should be depreciated over its remaining useful life, although in practice the cost of improvement may be added to the gross block of the asset and depreciated at the rate used for the asset
Repairs
Ordinary repairs are expenditures incurred to maintain assets in good working condition Periodic replacements of fused bulbs and worn-out car tyres, oiling and cleaning of equipment, and painting of buildings are treated as ordinary repairs since these expenditures are fairly regular and they benefit the year in which they are incurred
Repairs
Major repairs are different as they benefit a number of periods E.g. the benefit of relining a steel furnace or of a major rectification of an aircraft engine will go beyond the current year Most businesses expense these amounts over the periods in which they expect to benefit
Example
A car bought at a cost of Rs. 2,50,000 two years ago undergoes some major repairs at a cost of Rs. 40,000 The useful life of the car at the time of the purchase was estimated at five years, and the residual value at Rs. 25,000 Depreciation is on the straight-line basis As a result of the repairs, the life of the car is estimated to be extended by two years, while the residual value would be unchanged
Example Contd.
Cost Less Residual Value Original Depreciable Amount Less Accumulated Depreciation Remaining Depreciable Amount Add Major Repairs New Depreciable Amount Remaining Useful Life Revised Depreciation Expense
Rs. 2,50,000 - 25,000 2,25,000 - 90,000 1,35,000 + 40,000 1,75,000 5 Years 1,75,000 / 5 Years Rs. 35,000 / Year
Repairs
An enterprise may relocate its factory, or rearrange and reinstall a group of machines in a plant, for improving efficiency, and incur substantial expenditures for this purpose These expenditures usually benefit a number of periods, and are expensed over the periods in which the benefits are realized
Exercise
Shekhar Company bought a boiler for Rs. 700,000 The boiler was expected to last eight years, with an estimated residual value of Rs. 60,000 at the end of that period After using the boiler for five years, the company carried out some repairs to it at a cost of Rs. 1,50,000 to improve its thermal efficiency as well as reduce the level of carbon emission As a result, the remaining useful life of the boiler is expected to increase by two years Its estimated residual value is not affected The company provides straight-line depreciation Compute the yearly depreciation expense after the repairs
Depreciation Allowance Rates for Tax Purposes Class of Assets Buildings Furniture and Fittings Machinery and Plant Ships Aeroplanes, aeroengines Depreciation Allowance Rate (%) 5 to 100 10 15 to 100 20 40
1 2 3 4 5 6
Recap
Fixed Assets
Next Session
Liabilities