Hi, Capitalising previously expensed costs requires the following adjustments - Assets + Cost - depreciation / amortisation My question here is : Would you ever have to increase the cash balance first to offset the previous cost of buying the asset, followed by capitalising the costs? How do you account for the way the purchase is financed? - Liabilities: question: never changed? (expect for lease recognition by lessee) - Equity: Retained earnings increased by cost, lowered by depreciation/amortisation expense. Thx
Why one should adjust previous total cash balance of purchasing asset. Asset is bought, cash spent no matter about classification. Anyway, it may be taken adjustment in CF classification CFO-CFI relation and total cash balance remain same.
When you buy new car privately you are spending your cash for this purchase, no matter if you decide note this as not ordinary spendings than long term investment in your private budget file.
Again when you spend your own cash savings for car purchasing your prior liabilities (eg. mortgage appartment loan) are not affected. If you purchase new car upon new bank loan or leasing your total liabities will increase.
If you are talking about adjustment expensing vs capitalizing thus.
Earnings - Expense (prior capitalized) + annual depreciation expense for prior capitaized asset (add back).
If you are talking about net earnings, all of above should be adjusted net of tax (1-t).
If you expense asset purchasing, all else equal, it will be reflected only on earnings in the year of expense recognizing.
If you capitalize asset purchasing, it will be reflected on earnings in sequential periods due to a depreciation effect.