Advantages And Disadvantages Of Capitalising Cost

1168 Words3 Pages

As mentioned above, companies can typically capitalise costs only when the resource acquired will provide future benefits. This means resources that are beneficial for the business more than one operating cycle can be capitalised. 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 …show more content…

Nonetheless, a decision to expense the costs will be reported in cash flow from operations. • Reported assets – The company’s total assets will be smaller. • Financial ratios – When it comes to different financial ratios, the decision to expense will result in higher operation-efficiency ratios. Limitations 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

Open Document