Start networking and exchanging professional insights

Register now or log in to join your professional community.

Follow

: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset?

user-image
Question added by Salah Elsheikh
Date Posted: 2013/04/30
Mohammad Ashfaq
by Mohammad Ashfaq , Financial Controller , Union COOP

Accruals concept in accounting requires that expenses shall be recognised when they are incurred whether they are paid or not.
Following accrual based accounting, those expenses/expenditures are charged to IS which are incurred in the reporting period and the rest is capitalized.
In later periods capitalised items are charged to IS of relevant period by depreciating/amortising them.
However, carried values of those capitalised items are subject to fair valuation and, hence, revaluation and impairment obliged the accrual concept.

mukkur srinivasan varadhan
by mukkur srinivasan varadhan , Chartered Accountant , Chartered Accountant in practice

Outflows(cash) for Capital Expenses bring into existence  capital assets, whereas revenue outflows (cash)donot bring into existence anlother asset..

Aya Barad
by Aya Barad , Writer , Al Manara

Accrual Accounting: An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.
The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received).
This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.
http://www.investopedia.com/terms/a/accrualaccounting.asp

Muhammad Afaq
by Muhammad Afaq , SENIOR FINANCIAL ACCOUNTANT , United Eddy Company (United Yousef M. Naghi Group)

Any expenditure related to an items which can be used for many years is termed as Asset of the concern.For property plant and equipment. Therefore the purchasing of PP&E is considered as capital expendiute and it is capitalized over the year.

While expenses like salaries and taxes,wages, utilities expenses are being incurred for a specific accounting period to support  operational activities. Thats why these expenses do not create any asset.

Muhammad Asif Jajja
by Muhammad Asif Jajja , Accountant , Pakistan Veterinary Medical Council

A company asset that is vital to business operations but cannot be easily liquidated i.e.
The value of Property, Plant and Equipment is typically depreciated over the estimated life of the asset, Capital as well as Revenue Expenditures both are charged to income statement however we can understand in a way that revenue expenditures are short term expenditures which are charge to the income statement in the reporting year and capital expenditures are long term expenses and charge to the income statement according to the life of the assets in shape of depreciation.
Recognition of the expenditure and fair re-valuation of the assets, oblige the accrual concept.

More Questions Like This