Accounting Yr 1 Question~~ (1 Viewer)

[ninicole]

If buying a computer is recorded as a debit to the asset account and repairing the keyboard (after you spilt coffee on it) as a debit to the expense account, how would you record upgrading of the CD drive to one that could burn DVD's? What factors would you consider in deciding to record the upgrade as an asset or expense? Either way involves a debit to the left-hand side of the accounting equation, so does it matter how it is recorded?

 

[Sarah168]

Assuming the computer is a PPE (propert, plant and equipment) asset, damages are recorded as an expense (like you said) but an upgrade which improves the life of the asset, it's capacity to function (and a few other things but I don't have my textbook here. Sorry.) would mean that it would be capitalised rather than expensed.

It wouldn't make a difference to the overall accounting equation but it's important to recognise the fact that your PPE asset may have a longer useful life for depreciation reasons or other things.

Ahhhh sorry for such a bad response, I don't remember half this stuff and I only learnt it last Sem . Someone else will provide a better answer.

 

[ZabZu]

What you are doing is upgrading the CD drive so therefore you debit the CD drive to increase its value. Eg. was worth $200, now due to the change its $300.

If you spend money to maintain the CD drive without increasing its capability then it's an expense. Like what you said with the coffee.

From what i learnt last semester it's very important that you record it correctly.

 

[Halo]

More generally, if the expenditure provides future economic benefits (in this case, DVD burning capability) then it should be capitalised. If not, it should be expensed in the current period (merely repair/maintenance).

Difference: timing of expense. If it is capitalised it will be written off over the next few periods, rather than all in the current period.

What is the implication for profit?

 

[seremify007]

More generally, if the expenditure provides future economic benefits (in this case, DVD burning capability) then it should be capitalised. If not, it should be expensed in the current period (merely repair/maintenance).

As I've come to learn both from uni (see quiz version 2!) and work, this isn't always the case... but as you said, 'generally', if it increases FEB rather than maintaining current FEB, then it should be capitalised as it's an asset.

Difference: timing of expense. If it is capitalised it will be written off over the next few periods, rather than all in the current period.

What is the implication for profit?

I think this is one of those "thinker" questions for the topic creator