PQ AAT level 3
Calculating the cost of an asset T Teresa Clarke explains all you need to know about assets
ask 1 of the Advanced Bookkeeping exam requires you to calculate the cost of an asset. You will be given a purchase invoice with a number of different elements to it and asked to separate the capital cost – the cost of the asset – from the revenue expenses. The cost of the asset is the asset cost, plus any costs needed to get it into a working condition. I prefer to explain this as the cost of the asset is the asset cost, plus any one-off costs. Any cost that will need to be repeated is a revenue expense. Assets are only classed as assets if they are above the materiality level for the organisation. In the examples below we will assume that our organisation has a policy of capitalising items of £100 or more. Example 1 A printing machine is purchased for the office and paid for using the business debit card. Printing machine £1,000 Installation cost £100 Ink cartridges £50 Total cost £1,150 The printing machine cost plus the installation cost are one-off costs. We only buy the printing machine once and it only has to be installed once. The ink cartridges are a cost that will need to be repeated when they need to be replaced so these are a revenue expense. The total cost of this asset is £1,100. The journal entries for this would be: Dr Office machinery £1,100 Dr Office expenses £50 Cr Bank £1,150 Example 2 A van is purchased for use in the business and paid for by bank transfer on the same day. Van £20,000 Road fund licence/tax £300 Insurance £600 Delivery charges £200 Total cost £21,100 The van cost plus the delivery charges are one-off costs. We only buy the van once and only pay for the delivery charges once. The road fund licence and the insurance need to be repeated each year, so these are revenue expenses. The total cost of this asset is £20,200. The journal entries for this would be:
Dr Dr Cr
Van at cost Vehicles expenses Bank
£20,200 £900 £21,100
Example 3 A machine is purchased on credit, with payment due within 60 days. Machine £40,000 1 year’s maintenance costs £1,000 Installation fee £800 Engineer’s set up costs £200 Delivery fee £300 Total cost £42,300 The machine cost plus the installation fee, the engineer’s set up costs and the delivery fee are all one-off costs. We only pay for the machine once, the installation once, the set-up costs once and the delivery costs once. The maintenance costs will need to be repeated next year, so this is a revenue expense. The total cost of this asset is £41,300. The journal entries for this would be: Dr Machinery £41,300 Dr Repairs and maintenance £1,000
Cr
Other payables
£42,300
Example 4 Chairs are purchased for the conference room and paid for from the business bank account on the day of delivery. 25 chairs for conference room at £80 each £2,000 Total cost £2,000 Even though the total cost for these chairs is £2,000, the cost of each chair is below the materiality level for the organisation, so none of this capitalised. They will, instead, be classed as office expenses, so revenue expenses. The journal entries for this would be: Dr Office expenses £2,000 Cr Bank £2,000 If you enjoy my way of explaining things, you might like my workbooks, which are all available from Amazon in both paperback and as eBooks. The links to all my workbooks can be found at https://www.teresaclarke.co.uk/ books/ • Teresa Clarke FMAAT
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PQ Magazine September 2022
