Vehicles may require certain replacement parts that enhance serviceability. The matter of defining the materiality of the amount is important when establishing policies for capitalized expenses. The effect of this accounting entry is reflected in the presentation of the net book value, while its acquisition or historical cost remains unchanged. The accounting entry for this type of approach is as follows:ĭr. The underlying reason for the use of this method is the enhancement of the serviceability of the asset, and not necessarily prolonging the length of its services. The related depreciations are likewise spread over the lengthened life to address the expense recognition The accounting entry involves a debit to the asset account and a credit to cash or accounts payable, whichever is applicable.Īnother accepted method is to reduce the accumulated depreciation of the asset which is often applicable for major overhauls or cost of replacement parts for motorized vehicles. However, it is important that the company sets specific policies on how major expenditures for plant, property, and equipment should be treated in their books, inasmuch as the principle of “consistency” is a significant rule that should be adhered to.Īn expense is added to the book value of a particular asset if it prolongs or extends the remaining life of the equipment or machinery. The same principle of “future years’ benefits” applies when determining if the overhaul, repair, and maintenance expenses that will be added to the assets’ book value. Principles for Overhauls, Repairs or Maintenance of Assets They are amortized over the term of the loan, based on the principle of matching expenses against the income gained from processing the loan. In these cases, only the loan origination expenses that pertain to long-term receivables qualify as capitalized expenditures. Appraisal and inspection expenses, property and credit checking, including allocation of employees’ salaries involved in loan processing, are some examples of this expense.įor lenders, the transaction involves the creation of receivable accounts, which are assets by nature and may either be short term or long term. Origination costs are the related expenses incurred by financial institutions in processing loans extended to borrowers. The recognition of expenses will coincide with the realization of the income generated by the loan. Substantial expenses paid for loan origination costs are deferred by capitalizing the outlay. The Rule On Loan Origination Costs Incurred by Financial Institutions Since businesses utilize different kinds of depreciable assets and amortizable expenses, the Financial Accounting Standards Board deemed it best to institute specific GAAP accounting rules for capitalizing costs. The most common methods of depreciation used are the straight-line method and the accelerated method.Īll of these can be easily applied if there are uniform guidelines to observe. The length of time involved in spreading out the benefits is referred to as the useful life or the economic life. Inasmuch as the principle of “future years’ benefits” is a consideration when recognizing an expense as an asset the acquisition value will be depreciated or amortized for more than a year. The latter are incurred in order to sustain the daily operations within a particular calendar or fiscal year, regardless if the amount involved is substantial or minimal. There is the matter of determining if the costs can be harnessed to benefit future objectives and not just the day-to-day operations, as opposed to administrative and operating expenses. Related policies are largely based on the function of the asset purchased or the purpose of the expenses incurred. Cost capitalization is observed if a major expense merits recognition as an investment of capital funds instead of being recognized as an expenditure for the year.
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