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Simple Business


2.1.7. Accounting Issues
2.1.7.1. Capitalised Expenses
General e xpenses represent an outflow of va lue fro m the business. For
e xa mple , payments made for rent represent a flow of va lue out of the
business.
In the case of capital transfers, such as purchasing equipment, this represents
a cash payment, but does not represent an outflow of value fro m the business,
as the equipment co mes into the business in place of the cash that has flowed
out.
A similar issue can arise in other circu mstances.
For e xa mp le, e xpenses incurred in constructing a building do not represent an
outflow fro m the business, because the completed build ing would have a
value that would offset the cash that was spent.
In these cases, the payments would not be included in the p rofit and loss
statement.
Instead, the payment amounts are added to the balance sheet as an asset.
This is known as capitalising e xpenses.
The asset would then be depreciated in the same way as assets that were
purchased.
This enables the balance sheet to reflect the asset that has been created, and
prevents the profit and loss statement fro m suggesting that large e xpenses
were incurred, when in fact the payments were effectively a capital t ransfer,
rather than a loss.
However, this is a controversial area.
Capita lising e xpenses reduces the expenses in the profit and loss account, and
so this ma kes the profit appear to be higher than it would be if pay ments were
e xpensed through the profit and loss account rather than being capitalised.
This approach accurately reflects the results of the activity when a genuine
asset is created.
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