After acquiring the asset and recording its value according to its purchase price in addition to all the expenses spent on it until it is ready for work, there are additional expenses that may be spent on the asset after its use, such as maintenance expenses and operating or development expenses, and here a distinction must be made between two types of expenses, including what It is loaded on the original, some of which is charged on the income of the financial period.
They are the expenses that the establishment pays and the establishment benefits from for one fiscal year or less, and it is called revenue because it contributes to achieving revenue during one fiscal year, so that it appears in the income statement deducted from the period’s revenues, such as asset maintenance expenses, salary expenses, telephone expenses, electricity, advertising, and others, and it is recorded In the books according to their name on the debit side, as we explained in the previous lessons.
They are the expenses that the facility pays and the facility benefits from for more than one fiscal year, such as the expenses of building restoration and car engine replacement.
So, capital expenditures are those expenses that will increase the useful life of the asset, so they are charged to the cost of the asset, while revenue expenses are charged to the income of the period so that they appear in the income statement deducted from the revenues of the current period to be closed at the end of the period, such as expenses spent on maintenance and repair of the asset To maintain the estimated useful life of the asset.
Re-estimate the useful life of the asset
The capital expenditures that are charged to the cost of the asset will increase the useful life of the asset, and this in turn requires us to re-estimate the useful life of the asset again and change the depreciation premium for the coming years and the year in which the re-estimation was made without affecting the previous years, and the new depreciation premium is calculated according to The following equation:
New depreciation expense = net book value of asset - scrap
remaining useful life
knowing that :
The net book value of the asset = cost of the asset - accumulated depreciation
If you know that Al-Amal Company bought a car at a value of $10,000 on 01/01/2012, its useful life was estimated at 5 years and its scrap value was $2,000, and on 01/01/2015 the company decided to re-estimate the estimated useful life of the car from 5 years to 7 years, noting that The company uses the straight line method, and the liability is:
Calculation of depreciation expense for the year 2015.
Calculating the depreciation expense for the year 2015, if we assume that the cost of improvements (capital expense) equals $3,000.
1 The depreciation expense of the asset is extracted according to the old useful life
Old depreciation premium = 10,000 - 2,000 = 1,600
2 We extract the accumulated car depreciation balance up to 01/01/2015, which is equal to the total depreciation installment for the years 2012+2013+2014 and equals $4,800
3 We extract the book value of the car, which is equal to the cost of the car - the compound depreciation of the car, i.e. 10000-4800, equal to 5200 $
4 After finding the net book value of the car on 01/01/2015, we can calculate the new depreciation premium as follows:
New depreciation expense for the year 2015 = 5200 - 2000 = 800
7 - 3
5 The new depreciation premium is calculated after adding the cost of improvements (capital expense) as follows:
New depreciation expense for the year 2015 = (5200 + 3000) - 2000 = 1550