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Property, plant, and equipment
Property, plant, and equipment
Definition of the term "capitalize"
Definition of the term "capitalize"
Some costs are expensed and recorded in the income statement. Other costs are recorded as assets in the balance sheet or, in accounting terminology, they are capitalized. Most capitalized costs will eventually turn into expense, but the original journal entry recorded when the cost is first incurred is as follows.
Equipment
Equipment
What is equipment?
Equipment includes machinery used in manufacturing, computers, cars and trucks, furniture, and fixtures.
Aside from the purchase price, what are some other expenditures included in the initial cost of equipment?
Sales tax.
Transportation costs if the buyer pays.
Installation costs if the buyer pays.
Testing and legal costs.
Insurance during shipment.
Land
Land
The cost of land should include the following.
Closing costs: Fees for an attorney, real estate commissions, title and title search, and the recording of the deed. (What's the difference between a title and deed?)
Other items: Back taxes, liens, mortgages, other obligations.
Land improvements
Land improvements
Land improvements are costs to improve land and can be capitalized. It's important to note that land is assumed to have a perpetual life, but land improvements are assumed to have a finite life.
Buildings
Buildings
The cost of buildings should include the following.
Real estate commissions.
Legal fees.
Renovation and remodeling costs.
Natural resources
Natural resources
Natural resources are assets where the benefit is obtained from consuming the resource (e.g., oil is made into gasoline that is used to power cars and trucks). Examples include: Timber, mineral deposits (e.g., coal), oil and gas deposits.
The cost of natural resources includes the following.
Asset retirement obligations
Asset retirement obligations
An asset retirement obligation is an obligation associated with the disposal a property, plant, and equipment asset (most often a natural resource asset).
The 0.79383 in the calculation above is the present value of $1, where the number of periods is 3 and the interest rate is 8%.
Intangible assets
Intangible assets
Intangible assets are assets, other than financial assets, that lack physical substance. Examples include patents, copyrights, trademarks, franchises and goodwill. Each is described below.
Because internally developed intangible assets cannot be capitalized, some have questioned the usefulness of GAAP financial statements.
Because internally developed intangible assets cannot be capitalized, some have questioned the usefulness of GAAP financial statements.
Patents
Patents
A patent is an exclusive right to manufacture a product or to use a process.
Copyright
Copyright
A copyright is an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software.
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