Technical Accounting Entry

[PremRaj]

Hi,
We have some electronic devices in stock and we are renting the said devices. The life of the devices depends. Some are 5 years and some 10 years.

My query is:- when we will do the sales through rental, what will be our cost. Since this is not Fixed Assets, I can't treat as depreciated.

Please advice the accounting terminology for booking the cost of sales. Thanks

 

[StanleyR1]

Why are they not Fixed Assets? Have the rent-to-own assets already been expensed or are they in inventory? Are there any other costs related to the sale?

 

[Praz Finpoint]

If these are long term assets with long Useful Life - why are they not capitalized as Fixed Assets to begin with?

I dont quite understand why they would not be part of Fixed Assets - the cost of sales will be the depreciation, repairs & maintenance and other supplies provided to the customers as part of the Lease Agreement.

Also since this is a Lease Arrangement - you may need to consider whether this is an Operating Lease or Finance Lease, the definition of which will impact what and how you recognize the transactions (simpler method is to go with Operating Lease), and the evaluation of which can't be done without reviewing the Lease Agreements.

 

[Prem Raj]

Why are they not Fixed Assets? Have the rent-to-own assets already been expensed or are they in inventory? Are there any other costs related to the sale?

Categorized in Inventory. This is inventory items, for the rental purposes

 

[Prem Raj]

If these are long term assets with long Useful Life - why are they not capitalized as Fixed Assets to begin with?

I dont quite understand why they would not be part of Fixed Assets - the cost of sales will be the depreciation, repairs & maintenance and other supplies provided to the customers as part of the Lease Agreement.

Also since this is a Lease Arrangement - you may need to consider whether this is an Operating Lease or Finance Lease, the definition of which will impact what and how you recognize the transactions (simpler method is to go with Operating Lease), and the evaluation of which can't be done without reviewing the Lease Agreements.

Since this is an electronic device, the management will not want to keep it in the Fixed Assets. In the system, it would be treated as Inventory categorization.

 

[Praz Finpoint]

Have you consulted with an Auditor before?

Based on what you have explained above on the background, the Assets do not meet the definition of Inventories, but rather meets the definition of Property, Plant and Equipment.

Property, plant and equipment are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than one period.

 

[Prem Raj]

Have you consulted with an Auditor before?

Based on what you have explained above on the background, the Assets do not meet the definition of Inventories, but rather meets the definition of Property, Plant and Equipment.

Property, plant and equipment are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than one period.

We didn't appoint any auditor, though this year, we are planning to appoint.

Can we use // Property, plant and equipment are tangible items // as part of rental services, and can depreciation be considered as cost of sales. Please advise. Thank you so much.

 

[Praz Finpoint]

We didn't appoint any auditor, though this year, we are planning to appoint.

Can we use // Property, plant and equipment are tangible items // as part of rental services, and can depreciation be considered as cost of sales. Please advise. Thank you so much.

Don't understand the question.

 

[Prem Raj]

What I am trying to ask is, we bought some equipments for rental purposes.
What is the accounting treatment for this equipment purchases. And, (5 years usage)
What is the cost of sales treatment at the time of sales (Rental - Monthly).

 

[Praz Finpoint]

When you purchase Dr Property, Plant and Equipment Cr Cash

Over the next 5 years depreciate the Asset - Dr Depreciation Expense Cr Accumulated Depreciation

Depreciation expense is also calculated and charged monthly but the difference is that irrespective of whether the asset is leased or otherwise, if you choose as an Accounting Policy to depreciate over the Asset useful life, must depreciate the asset even when it is not leased to customers and left idle.

 

[Prem Raj]

Thank you and well noted.