How do you record the cost of constructing a new parking lot at the company’s office building? As an asset? Liability? Capital expenditure? I advice you read on to find out.
Unlike land, buildings are subject to depreciation or the periodic reduction of value in the asset that is expensed on the income statement, and reduces income. They also can incur substantial maintenance costs, which are expensed on the income statement and reduce an accounting period’s income.
Meanwhile, buildings are listed on the balance sheet as a long-term or non-current asset, since this type of asset is held for business use and is not easily converted into cash. Also since buildings are prone to depreciation, their cost is adjusted by accumulated depreciation to arrive at their net carrying value on the balance sheet.
Asset or capital improvements are projects executed to enhance or improve a business asset that is in use. The cost of the improvement is capitalized and recorded to the asset’s historical cost as a fixed asset. Since the cost of the improvement is capitalized, the asset’s periodic depreciation expense will be shifted, along with other factors used in calculating depreciation.
Meanwhile, capital improvements should not be confused with regular maintenance expenses to maintain an asset’s functionality, which are seen as period costs that are expensed on the income statement. When the cost of a capital improvement is capitalized, the asset’s historical cost increases and periodic depreciation expense will increase.
For instance, costs to expand the space on a warehouse or to construct a new car park at the headquarters would be capitalized because the value they provide will extend into future accounting periods. However, maintenance costs are expensed and reported on the income statement as a reduction to current revenues since they offer a benefit in the current accounting period and should be matched with the revenues earned during this period.
Few examples of expensed costs include payment of regular service maintenance on equipment and machinery. Nonetheless, when the asset’s construction is complete and the asset is ready for use, any additional interest expense incurred is no longer capitalized as part of the asset’s cost. This interest is expensed on the income statement and reduces income for the accounting period.
The Cost Of Constructing A New Parking Lot At The Company’s Office Building Would Be Recorded As?
To cut the long story short, the cost of constructing a New Parking lot at the company’s office building would be regarded as a capital improvement and recorded as a fixed asset. Your company parking lot, customer parking garage and company vehicle garage all qualify as fixed assets. Permanent structures that are part of your business – such as an outside pavilion, a sheltered picnic area or a concessions stand – are considered fixed assets.
A company’s balance sheet statement consists of its assets, liabilities, and shareholders’ equity. Assets are further categorized into current assets and noncurrent assets, the difference for which lies in their useful lives. Current assets are typically liquid assets which will be converted into cash in less than a year.
Noncurrent assets refer to assets and property owned by businesses which are not easily converted to cash. The different categories of noncurrent assets include fixed assets, intangible assets, long-term investments, and deferred charges.
For the sake of clarification, fixed asset is a long – term tangible piece of property or equipment that a business owns and uses in its operations to generate income. These assets are not expected to be consumed or converted into cash within a year.
Fixed assets most commonly appear on the balance sheet as property, plant, and equipment (PP&E). They are also referred to as capital assets. A fixed asset is purchased for production or supply of goods or services, for rental to third parties, or for use in the organization.
Note that the term “fixed” translates to the fact that these assets will not be used up or sold within the accounting year. When a company purchases or disposes of a fixed asset, this is recorded on the cash flow statement under the cash flow from investing activities.
Have it in mind that the purchase of fixed assets represents a cash outflow to the company, while a sale is a cash inflow. Once the value of the asset falls below its net book value, the asset is subject to an impairment write-down. This means that its recorded value on the balance sheet is adjusted downward to reflect that its overvalued compared to the market value.
Howbeit, immediately a fixed asset has approached the end of its useful life, it is usually disposed of by selling it for a salvage value, which is the projected value of the asset if it was broken down and sold in parts. Although in some cases, the asset may become obsolete and may lack a substantial market for it, and will, therefore, be disposed of without receiving any payment in return.
Either way, the fixed asset is written off the balance sheet as it is no longer in use by the company. These fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For instance, if a company sells produce, the delivery trucks it owns and uses are fixed assets.
If a business creates a company parking lot, the parking lot is a fixed asset. Note that a fixed asset does not necessarily have to be “fixed” in all sense of the word. Some of these types of assets can be moved from one location to another, such as furniture and computer equipment.