This means that the expenses from acquiring these resources are recorded as assets in the company’s balance sheet. The costs will then show on the balance sheet in the coming financial years through amortisation.
Resources that will continue to provide future benefits could be anything from machinery to a business property.
Companies should also consider capitalising cost when they add to the value of an existing resource. If the company upgrades part of the tools, property or equipment it uses, in a manner that directly increased the value of the asset, it could be capitalised.
In many instance, fixed assets are typically capitalised, as they continue to provide benefits for the company for a longer period.
Companies can also deal with intangible assets. These are non-monetary resources, which have no physical substance yet still provide the company a benefit. These could be items such as research and development costs or patents and copyrights.
Intangible assets that can be capitalised often include:
• Full acquisition costs of obtaining a patent or copyright from another entity.
• Full acquisition costs of obtaining a brand or a trademark from another entity.
• Software development costs with economic feasibility beyond one operating cycle.
How will capitalisation affect assets?
The decision to capitalise the costs will naturally have an impact on the company’s financial statements. Here are some of the main areas involved with asset capitalisation and how they can change the company’s f...
... middle of paper ...
...tions of expensing
There are certain special limitations to expensing, especially when it comes to starting up a business. In many instances, immediate costs can often be capitalised even if they don’t necessarily normally fall under the capitalising rules during the first financial year of the company.
You should also keep in mind that while R&D costs are typically considered an expense, certain legal fees involved in acquiring these, as well as patents, could be capitalised.
In addition, you need to be careful when expensing costs that deal with repairs or upgrades. If the value of the item significantly improves or the lifespan of the item expands, the costs might be better off capitalised.
Finally, expensing will bring down the income of the business and therefore, you want to be careful to ensure your short-term finances are able to adjust to this effect.
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