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 size of such Machinery will be so huge that it might take a couple of days to install it. 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 the Costs incurred till 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 the revenues with costs throughout machinery usage.
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. It’s general practice is to capitalize on all such expenses after reducing its revenue.
If there are any malfunctions, vibrations, or faults in operation, corrections are possible 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 need to have the installation done for the Air conditioners. These installation costs include the Customization Charges, Labour expenses, Expenses incurred for checking the Machinery (Like Electricity), etc. The list is vast and does not include these examples. So, the type of costs that can feature as installation expenses depends on the nature of the asset.
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 machinery purchase costs and expenses relating to the installation, such as transport expenses, financing costs, taxes, etc. So, we will add up all installation costs to the asset and capitalize them.
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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