Capitalising an Asset
Some Of the nominals and ledgers used in this topic may be different to those in your chart of accounts.
Capitalisation is the addition to the Balance Sheet of an Asset that could otherwise have been treated as an expense. In general, the capitalisation of an Expense is used in relation to the acquisition of a new Asset that is a long-term cost, rather than an expense for only one year, and where the cost is spread out over a specific period of time.
This topic uses an example of an Asset which has been purchased and coded to the expense nominal DON4010 - Equipment (Not IT) and which is used to go through the capitalisation process for:
The following graphic displays a non-order purchase invoice, DOPI.2, with the expense coded to nominal DON4010 (Equipment (Not IT)) on Cost Centre account PBUI (Premises - Buildings):
There are two adjustments that need to be made at this stage to change the purchase from an Expense to an Asset.
Adjustment 1 – Moves the Expenditure to the Balance Sheet
To complete this stage, post a General Journal.
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Credit the Cost Centre Ledger account and
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Debit the relevant Fixed Asset at Cost nominal on the appropriate Fixed Asset Ledger account.
Adjustment 2 – Transfers the funds from Revenue to Capital
To complete this stage, post a General Journal
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Debit the Cost Centre used for the purchase via the
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Credit the relevant Capital Ledger account via the
We can now see that the adjustment postings to the Cost Centre ledger have netted off as follows:
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£5000 credit posted to the Cost Centre in the first adjustment journal net off against
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£5000 debit posted to the Cost Centre in the second adjustment journal
and the original £5000 debit posted for the purchase remains on the Cost Centre Account:
We can now also see a £5000 debit on the Fixed Asset Account:
