4 minute read
AAT level 3 Our AAT guru Teresa Clarke explains how to calculate the cost of an asset
Calculating the cost of an asset
Teresa Clarke explains all you need to know about assets
Task 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 Van at cost £20,200 Dr Vehicles expenses £900 Cr Bank £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
ONE WEBSITE TO RULE THEM ALL! Check out the funky website
Go to pqmagazine.com – where nothing is fake, and all the news is real!
Pick HTFT for AAT
Starting September 2022, we have live courses for AAT Level 3 and AAT Level 4 under Q2022.
HTFT live: pre-recorded syllabus videos that lead into scheduled live online interactive Masterclasses (with expert tutors), all designed to support your mastering of knowledge – accompanied with computer based tests and mock exams
Think ACCA, think HTFT
We have a full suite of ACCA Applied Skills and Strategic Professional courses for December 2022 exams starting early September (weekend of 10th and 11th).
▪ Membership of our vibrant Online Learning Community and access to a dedicated tutor
▪ HTFT Partnership student notes and ACCA authorised study text, exam kit and pocket notes
▪ Full syllabus, Topic by Topic recordings supported by timetabled ‘live online’ Tuition Masterclass sessions –recorded, downloadable and playable on all devices
▪ Scheduled ‘live online’ Revision Masterclass sessions – recorded, downloadable and playable on all devices
▪ HTFT computer based tests and mock exams, marked, with answers and video debriefs
Study CIMA, choose HTFT
Studying CIMA? Our HTFT live, HTFT on-demand and HTFT play resources are all here to help you prepare for, and pass, your exam.
HTFT live: join our expert tutors live online for interactive Masterclasses, designed to support your application of syllabus knowledge.
HTFT on-demand: drive your learning, with full flexible resources that you control
HTFT play: Boxsets of topic recording and Proficiency exam-style practice assessments
CIMA F1 live starts 7th September, CIMA F2 live starts 22nd September and CIMA F3 live starts 27th September Case Study: OCS (23rd Sept), MCS (30th Sept), SCS (7th Oct)
