INSTALLATION COSTS: WHAT IS IT AND EXAMPLE - DUDAS - 2025

The installation costs are all costs that are made to put basic infrastructure and services, according to the requirements of operating a company, as for the presentation and give some comfort.

The definition of a facility is the act of placing something, a device that remains in place, be it a military base or a piece of a machine that often involves construction and different types of materials. Putting in a new air conditioner is an example of an installation. The control panel used to manage the temperature of an office is another example.

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Property facilities are those that remain attached to a building, or integrated into its structure, and that cannot be removed without damaging the building or structure.

These facilities include elevators, escalators, plumbing and electrical wiring, fire fighting equipment and water sprinklers, and cooling, heating and ventilation systems.

Original cost

Original cost is the total price associated with the purchase of an asset. The original cost of an asset takes into consideration all the elements that can be attributed to the purchase and use of the asset.

These costs include, in addition to the purchase price, elements such as: commissions, transportation, appraisals, guarantees, and installation and testing expenses.

Original cost can be used to value an asset type, including equipment, real estate, and security instruments.

The balance sheet and the accounting notes to the financial statements will break down the historical cost of property, plant and equipment and the accumulated depreciation of these long-term assets. The difference is known as the book value.

Determining the original cost of an asset is important in calculating the asset's tax base. The original cost of an asset is more than the purchase price of the asset, and the costs together can reduce the potential tax gain on the sale of the asset.

Total cost of the asset

The definition of the cost of an asset is the sum of all the costs that are necessary to get an asset in place and ready for use.

Therefore, the cost of installation labor, such as related salaries and fringe benefits, is part of the cost of the asset.

The total cost of the asset, including installation expenses, will become an expense when the asset depreciates over its useful life.

The installation expense must be added to the cost of the assets themselves. According to the property, plant and equipment accounting standard, the cost of the asset and incidental expenses, such as the installation expense to put the asset into use, must be measured and accounted for to determine the actual cost of any property, plant and team.

Therefore, the asset account "Property, plant and equipment" must be debited and the cash account must be credited.

Capitalized costs of fixed assets

Companies often incur expenses that are associated with the construction of a fixed asset or its use. These expenses can be capitalized and included as part of the base cost of the fixed asset.

If a company borrows funds for the construction of an asset, such as a property, and incurs interest expense, then it is allowed to capitalize this financing cost.

Additionally, the company can capitalize other expenses, such as labor for installation, transportation, testing, sales tax, and materials that are used to build the capital asset.

However, after the fixed asset is installed for use, any subsequent maintenance expenses should be expensed, to the extent incurred.

Capitalize labor expenses

Standardized accounting rules allow the cost of putting property and equipment into service to be added to the direct cost of purchasing the property and equipment for the purpose of capitalizing it.

After all, the equipment cannot be used until it is properly installed and fully operational. Common installation labor expenses that can be capitalized include the expense for assembly and assembly.

The key to including labor as part of the cost of the fixed asset is that labor must be directly related to the installation and commissioning of the property or equipment.

Exceptions

Certain labor expenses cannot be capitalized, such as the expense incurred by a business owner working on the installation project.

Likewise, indirect labor expenses, such as the cost of the accountant who records the accounting transactions, at any time that is not directly monitoring the installation project.

Likewise, the time that is used to carry out the inventory to be used in the equipment or property, and the services provided or paid to officials or general employees of the company.

Maintenance and repair costs that are not related to the installation of the equipment or property cannot be capitalized.

Capitalization of moving expenses

Although the moving expenses incurred during the shipping and installation of fixed assets are originally capitalizable, labor that is related to relocating equipment or property after the assets are in service is not capitalized.

Typical moving labor expenses associated with relocation include disassembly, reassembly, packing, and shipping. Relocation costs will be recorded as expenses at the time of their occurrence.

Example

Original cost includes all quantifiable facets of a purchased asset. For example, a business purchases a piece of equipment with a price of $ 20,000. The purchase also involves $ 1,000 in fees, $ 700 in shipping and delivery costs, and $ 3,000 in installation and warranty costs.

The original cost of this equipment will then be $ 20,000 + $ 1,000 + $ 700 + $ 3,000 = $ 24,700. It is also known as historical cost, which is a common term in generally accepted accounting principles. This is the original cost that is recorded on the balance sheet.

The tax base can be calculated by taking the original cost and subtracting the accumulated depreciation of the asset. For the above equipment, suppose the accumulated depreciation is $ 14,700.

The book value of the company's books would be $ 10,000 ($ 24,700 original cost less $ 14,700 accumulated depreciation). If the company sells the asset for $ 15,000, it would record a gain on the sale of assets of $ 5,000.

References

1. Accounting Coach (2019). Accounting for Labor to Install Asset. Taken from: accountingcoach.com.
2. Eco-Finance (2019). Installation costs. Taken from: eco-finanzas.com.
3. Will Kenton (2018). Original Cost. Investopedia. Taken from: investopedia.com.
4. Betsy Gallup (2019). Accounting Rules for the Internal Capitalization of Labor. Small Business-Chron. Taken from: smallbusiness.chron.com.
5. Business Dictionary (2019). Installed equipment. Taken from: businessdictionary.com.