Question

discuss the effect on the financial statements of capitalising versus expensing costs in the period in which they are incurred.

Answer 1

Whether costs are capitalised or expensed in the period in which they are incured depends on whether the benefits of the costs are limited to the year in which they are incurred or spread over a future period.

When costs are capitalised, the effect of the costs is distributed over a future period, which results in the net income being uniformly affected over the period in which they are capitalised.

When the costs are expensed in the period in which they are incurred, the net income for the period is affected for the whole amount and there will not be any effect for the future periods.

Normally costs , the benefits of which are spread over a period of time are capitalised over such period so as to report the correct costs for the period which will give a true picture of the operations of the business.

When costs are capitalised, the balance value of the costs, which have to be expensed in the future , will be reflected in the balance sheet as assets which will give a measure of the value contributed by the costs for the future periods.