Explore BrainMass

Machinery and Equipment

The term 'equipment' in accounting includes tangible long-term assets such as all delivery, office and factory equipment. It also includes all furniture and furnishings owned, as well as fixtures that may be attached to land or buildings (including sheds, boilers, furnaces etc.). Most tools and machinery are considered equipment, as are similar tangible assets which are used in operations and have a useful life of more than one period. 

The historical cost of equipment is measured to include the purchase price as well as freight and handling costs (including shipping insurance), costs incurred in preparing it for use (including the cost of a foundation for fixtures: for example, if a cement pad is poured for a shed), assembling and installation costs, as well as the costs of conducting trial runs. Input tax credits are not included in the historical cost of the asset.  

Improvements (betterments) and replacements of equipment are usually expensed. However, where the expenditure increases the equipment's useful life or improves the assets productivity the cost of the improvement or replacement may be capitalized. Where the existing book value of the asset is known, the substitution approach may be used: the old book value is removed and it is replaced with the cost of the new asset. If the old asset's carrying amount cannot be determined, an accounted capitalize the new cost or charge the cost to accumulated amortizationIt may be desireable to charge the cost to accumulated amortization instead of capitalizing it where the asset's productivity isn't improved but its useful life is extended. Its relevant to note that the carrying amount of the asset will be the same regardless of whether the cost is debited to the asset account (capitalized) or debited to accumulated amortization.