Machinery is a Fixed Asset that assists in achieving the primary objective of the business, such as Manufacturing goods or processing raw materials. So, the Purchase of this Machinery will involve high costs, and the machinery will be so large that it might take a couple of days to install. We need to account for all the following charges incurred by the entity to record the machinery installation in the journal entry.
- Purchase Cost
- Taxes, if any
- Freight charges, if any
- All costs incurred through the date the asset is placed in service.
- Installation Charges and related Electricity expenses
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Why do we need to capitalize on all these expenses?
All the above expenses relate to Machinery. If no such Machinery is purchased, the entity will not incur these charges.
Similarly, the benefits arising from such machinery will not be just for a year or two. It reaps benefits throughout its useful life. So, we need to capitalize on all these expenses. Depreciation matches revenues with costs over the life of the machinery.
That’s the Logic behind adding all these costs to the Machinery Cost.
Also Read: Contingent Assets
What about the Trial Run Expenses?
Trial runs are conducted to verify the functioning and output of the plant and machinery. Revenue might be generated from the sale of such output. Its practice is to capitalize on all such expenses after reducing its revenue.
If there are any malfunctions, vibrations, or operational faults, corrections can be made before they worsen. So, a trial run is a crucial step in installing Machinery.
Installation of Machinery Journal Entry
1) Entry to record the Purchase of Machinery
2) Capitalizing on the Machinery Installation Charges
Installation charges incurred
We will incur the installation expenses, and then we need to verify and confirm the costs that need to be capitalized. Let’s record the Capitalization entry.
Capitalizing the installation Charges
3) Payment entry
Frequently Asked Questions
Is installation an expense?
Installation is an expense; we can capitalize it as an asset. The expense directly relates to the Fixed Asset, and it’s inappropriate to charge it as a regular expense in the profit and loss statement. Imagine installation as a foundation for the building. So, it’s a base for the asset to function.
Next Read: Machinery Sale Accounting
Is the installation of Machinery a capital expenditure?
All expenses incurred to bring the asset to its working condition are eligible for capitalization, and the asset will not be available for use if such costs are not incurred.
What are the installation costs?
Installation costs are the expenses necessary to put the asset to use. Not all the assets will be plug-and-play. For example, smartphones do not require any installation or demos. However, we have to install the Air conditioners. These installation costs include Customization Charges, Labour expenses, and Expenses for checking the Machinery (such as Electricity), etc. The list covers many items and does not stop at these examples. The nature of the asset shows which costs count as installation expenses.
Are installation fees capitalized or expensed?
Installation is a prerequisite for using any asset, so we shall capitalize it as an asset.
Summary – Installation of Machinery Journal entry
The Installation of Machinery Journal entry records the costs of purchasing machinery, including installation expenses such as transport, financing, and taxes. We add all installation costs to the asset and treat them as capital.
To summarize, we will account for the fixed asset by debiting the Machinery and crediting the bank account or non-current creditors for the invoice amount and installation expenses.
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