Accrue capital expenditure

[continuelearning]

Hi All,

I am new to the forum and greatly appreciate if anyone can help me.

I am working for a IT service provider and trying to work out a framework on replacing the fully depreciated hardware, storage, VM etc. However, I am trying to do this by phases. i.e I am trying to accrue capital expenditure by phases and % probably based on the capacity or usage.

For e.g. Plan to spend 50% of capex (capital expenditure) in next 6 months. Is it possible to accrue? if so, what will be the entries? should it hit the fix asset clearing account?

I understand I may not be able to accrue since there is no PO or work done/hardware not delivered. However, is there anyway for me to do so and not violating accounting rules?

Appreciate your advise.

Thanks & best regards

 

[Counterofbeans]

It sounds to me like you are planning on adding some fixed assets. In most cases, the accounting is fairly simple. I'm not exactly sure what you are trying to do in phases. The primary expense that hits the P&L with fixed assets is depreciation, which doesn't have much to do with the timing of cash flows.

If you don't have a signed commitment to purchase these fixed assets, just Dr. C.I.P. (Construction in Progress) and Cr. Cash as the payments are made. Once these assets are placed into service, move them out of CIP and into their respective fixed asset accounts and begin depreciation accordingly.

If you do have a signed commitment to purchase these fixed assets, I'd simply Dr. CIP and Cr. Accrued Expenses. Once the invoices are received, I'd move the liability out of Accrued Expenses and into A/P and then pay accordingly. The accounting for the fixed assets should correspond to above.

 

[continuelearning]

thank you so much.

 

[cmesh]

One other point: from a theoretical perspective, the question is whether a liability has been incurred.

This is addressed in FASB Concept Statement No. 6 which states, "A liability has three essential characteristics: (a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, (b) the duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and (c) the transaction or other event obligating the entity has already happened."