Can someone please explain what does it means capitalisation of inventories?
I saw a definition about it: TGAP requires capitalisation of all directly attributable costs and incomes to bring the inventory to its present location and condition.
What does it means “to its present location and condition”
Thank you in advance
Capitalization means listing it as an asset on the balance sheet, as opposed to listing it as an expense on the income statement.
Suppose that you sell wheels for donkey carts. When you buy the wheels from the manufacturer, you have to pay for the wheels themselves, and possibly for shipping the wheels from the manufacturer’s shop to your warehouse. If some of the wheels are damaged in transit, you may have to pay to have them repaired. You may have to repackage them (e.g., you buy the wheels by the hundreds, but you sell them in packages of four). And so on. All of those costs go into the account Donkey Cart Wheel Inventory on the balance sheet.
Thank you very much.
And what about cost capitalization? Example capitalized distribution cost. There is a formula for capitalizing costs : distribution cost/ purchase* stock. What is the use to divide it by purchase and multiply by the stock. Why is it necessary to capitalize costs?
I’m not sure what you mean by distribution cost. Can you give me an example?
Distribution cost includes staff expenses, fixed costs, energy and utilities, etc
Properly, you should capitalize all of those costs. I doubt that most companies do, however.
The matching principle: match costs to the revenues they help generate.