Page 209 - Accountancy_F5

Initial costs and accounting for acquisition of non – current assets

These are the costs incurred initially for bringing the asset to the location and in the
condition necessary for its intended use. These include acquisition costs, construction
costs, and installation costs of the non-current asset. Non-current assets such as property,
plant and equipment qualifying for recognition as an asset are initially measured at their
FOR ONLINE READING ONLY
acquisition cost. In establishing initial costs of a non-current asset, the following costs
are included:
(a) The purchase price;
(b) Costs directly attributable to bringing the asset to its location and in the condition
so as to make it available for its intended use; and
LANGUAGE EDITING
(c) Initial estimation of the costs of dismantling and removing the item and restoring
the site on which it is located.
In contrast, the following costs are NOT included in the definition of cost of non-current
asset as defined above:
(a) Administration and general overhead costs; such as office rent;
(b) Costs of launching a new product or service; such as advertising;
(c) Expenses on opening a new business facility or conducting business at a new place
e.g., expenses of an inaugural function;
(d) Costs of relocating e.g., costs of shifting a factory following a government order;
(e) Initial losses before the asset reaches its intended uses; and
(f) Errors related with bringing the asset to its required location and condition.

As for the accounting entries, the acquisition of non-current assets will be recorded in
ledger accounts as follows:
Dr Non-current assets xxx
Cr Cash / Bank/Payables / Other asset xxx

Example 7.1

Mbasha Holdings Limited is a manufacturer of furniture. The company acquired
machinery on 1 January 2022 for TZS 50 million, paying cash for this on 1 February
st
st
2022 the company bought a drilling machine for TZS 6 million, paid by cheque on 30
th
June 2022, the company bought on credit a transit van from Tony for TZS 25 million.
On 30 September 2022, the company purchased plywood for TZS 3 million in cash.
th

Student’s Book Form Five
196

23/06/2024 17:35
ACCOUNTANCY_DUMMY_23 JUNE.indd 196
ACCOUNTANCY_DUMMY_23 JUNE.indd 196 23/06/2024 17:35