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Written by : Rubin Rowbottom
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hi welcome to this quick tutorial about plant assets and the decision about whether to capitalize or expense the costs related to a plant asset first let's define plant assets plant assets are purchases or expenditures for items that are to be used in the organization for more than one operating period which is usually one year examples of plant assets include land land improvements buildings building improvements equipment and others the cost of a plant asset includes all normal and reasonable expenditures to obtain the asset and prepare it for use examples of costs include the purchase price transportation costs any installation cost sales and back property taxes and more so how do you decide if an expenditure expenditure should be capitalized or expensed the main question is whether the item is going to be consumed or used up within one year or less if the item will be consumed or used up within one year it will be expensed if it has an estimated useful life of greater than one year then it should be capitalized one more thing for small purchases it is not cost effective to capitalize a small expenditure it could cost more to track the plant asset over its life than it is worth as a practical matter companies will set a dollar limit below which they automatically expense the cost of the plant asset for example a company may purchase a trash basket for an office for twenty dollars while it may be true that the trash basket may have an estimated useful life of 20 years or more it would be too burdensome to track the small 20 20 cost other examples of small purchases could be a printer or a pen both have an estimated useful life of more than one year but are relatively low in cost and so may be expensed as a matter of policy so what happens when a purchase is capitalized or expensed if a purchase is capitalized its cost is added as an asset on the balance sheet so assets increase the purchase of a capital asset does not immediately impact the income statement the plant asset will be depreciated or expensed over the estimated useful life of the asset if the cost of a purchase is expensed it is deducted immediately as an expense on the income statement expenses are increased thus decreasing net income let's go through an example say the green hippo company purchased a new computer system for fifty thousand dollars the estimated useful life of the computer system is five years so the question is would the cost of the computer system be capitalized or expensed the cost to the computer system would be capitalized because the useful life of the computer system is more than one year for the next question in this example we are looking at whether the 50 000 that is capitalized would appear on green hippo's balance sheet or income statement the answer is that it would appear on the balance sheet as an asset a planned asset always appears on the balance sheet now let's look at another example the blue heron company pays 3 500 every year for routine maintenance on its machinery would the cost of the annual maintenance be capitalized or expensed the answer is that it would be expensed routine ordinary maintenance expenditures are always expensed never capitalized the next question is would the thirty five hundred dollars appear on blue heron's balance sheet or income statement the answer is that expenses appear on the income statement expenses never appear on the balance sheet expenses reduce net income okay that's it we are done this video was created and narrated by dr wendy teats have a great day
Thanks for your comment Son Northcraft, have a nice day.
- Rubin Rowbottom, Staff Member
Thanks for this interesting article
Thanks Jenine your participation is very much appreciated
- Rubin Rowbottom
About the author
I've studied screenwriting at Alfred State College in Alfred and I am an expert in management (outline). I usually feel rejected. My previous job was hotel and motel desk clerks I held this position for 24 years, I love talking about hiking/backpacking and woodworking. Huge fan of Panic at the Disco I practice equestrian: jumping and collect militaria.
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