Accounting

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Original cost

In accordance with generally accepted accounting principles, the property, plant and equipment must be accounted for at its cost and included as an asset of the company at the date of purchase. The original cost of the fixed asset includes its purchase price plus all reasonable and necessary amounts that were paid to have it ready for its intended use. Because these costs vary according to each type of fixed asset, below are some examples and problems that are usually presented in your posting.

Buildings

Buildings may be constructed or purchased in new or used finished condition. In the first case, the original cost of the building includes all costs incurred for its construction, from the payment to the architects, permits and building permits, to the contractors' charges, materials, labor and expenses General.

Real Estate

The original cost of a land includes three groups of disbursements: purchase price, costs related to the closing of the transaction and costs related to preparing the land for the intended use. The latter group includes, for example, the cost of clearing and leveling the land, the cost of demolishing and removing any unwanted buildings. The cost that is included as part of the land must be net of any value that is recovered in the demolition sale of doors, bars, etc.

It is important to be clear that the cost of fencing, paving the sidewalk, and water and lighting systems is not part of the cost of the land, since these assets, unlike the land, suffer a wear and tear over time and must be accounted for separately .

In the case of an existing, new or old building, its original cost includes, as well as land, all transfer costs and improvements made to repair and renovate the building for its original purpose.

Some unanticipated costs such as a strike of construction workers should be included as expenses and not as part of the cost of the building, because they are avoidable and unnecessary costs to complete construction.

Improvements and repairs

Throughout the useful life of an asset, disbursements related to them are usually made, ranging from the oil change, the muffler or the battery of a vehicle, to the complete modernization of a concentrating plant, for example. The accounting problem that these disbursements present is whether or not they should be included as part of the cost of the asset to be capitalized or whether they should be considered as expenses of the period.

The general rule in this respect is that all disbursements related to fixed assets that increase the future benefits of the asset should be activated. These benefits can be expressed as an increase in useful life, a substantial improvement in the quality of the products manufactured by the asset, a reduction in operating costs3, or an increase in productive capacity.