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Recording property and equipment additions – what exactly should you be capitalizing?

When accounting for property and equipment additions, it can be confusing to know exactly what should be capitalized or expensed when the asset is initially purchased. Often, I see clients capitalize the equipment’s purchase price but then expense the sales tax and transportation costs associated with acquiring the asset. So, to set the record straight, let’s look at the FASB Codification to see how we should account for these purchases.

According to the Codification, the cost of acquiring property and equipment “includes the costs necessarily incurred to bring it (the piece of property or equipment) to the condition and location necessary for its intended use.” It is important to note that the term “property and equipment” includes:

  • Office equipment
  • Machinery
  • Furniture and fixtures
  • Computers
  • Factory equipment
  • Other similar fixed assets

The following are expenditures that should be included in the capitalized asset’s cost:

  • Purchase price
  • Sales taxes
  • Transportation charges incurred (freight-in)
  • Insurance on the equipment while in transit
  • Assembling and installation costs
  • Costs of conducting trial runs – that is if the asset needs to be tested before it can be put to use
  • Delinquent taxes
  • Direct and indirect costs of constructing an entity’s own assets, including interest costs, where appropriate

The costs that should be capitalized include all expenditures incurred in acquiring the equipment and preparing it for use. A great way to standardize this process across an organization is by implementing a capitalization policy that clearly identifies which components of fixed asset additions should be capitalized.

Henry+Horne

Comments

  1. Allison says:

    You touch on the cost of trial runs. Would the raw material costs (ex. paper and ink) specifically purchased for those trial runs be capitalized?

    • hhadmin says:

      Hi Allison,

      The Codification does not specify what type of trial run costs should be capitalized but I believe you can make an argument to capitalize the raw materials and labor costs.

      Christine Brueser, CPA