Capital costs: what to capitalise and what to put through the P&L

Capital costs buy something that will be used over several years, so the accounting spreads the cost across those years instead of charging it all to the period when the money left. Getting the line wrong in either direction distorts profit: capitalising running costs flatters this year and burdens the next few, while expensing genuine assets understates both profit and the balance sheet. Most small-company disagreements with an accountant start here.

What counts as capital costs

• The purchase price of the asset itself, net of recoverable tax.
• Delivery, installation, assembly and testing needed to bring it into use.
• Professional fees directly attributable to acquiring or constructing it.
• Site preparation and any unavoidable dismantling obligation.
• Improvements that extend an asset's life or increase its capacity — as opposed to restoring it.
• Borrowing costs during construction, where the framework permits capitalising them.

What does not, however it feels

Training people to use the asset, routine maintenance, staff time on the project beyond directly attributable cost, administrative overhead, and losses while the asset is being commissioned. Repairs are the perennial argument: replacing like with like is maintenance even when the invoice is large, whereas replacing a component that materially upgrades capacity or extends useful life is capital. The useful test is not cost but whether the asset is now better than it was, rather than merely working again.

Set a capitalisation threshold and apply it consistently — commonly a few hundred to a few thousand in your currency. Without one you either track staplers as assets or quietly expense a van, and auditors treat inconsistency as the finding rather than the threshold itself.

Keeping it defensible

1. Write the policy down: threshold, categories, useful lives and the repair-versus-improvement test.
2. Record each addition with its invoice, the date it came into use and the components included.
3. Depreciate from the date of use, not the date of purchase.
4. Review useful lives annually against reality rather than against the policy you set once.
5. Record disposals as events with proceeds, so the gain or loss is visible.
6. Reconcile the asset schedule to the ledger every year end — the commonest small-company adjustment.

Ettex Sheets holds the schedule: additions with dates and components, useful life and method per category, accumulated depreciation and net book value by year, and disposals with proceeds. Keeping it alongside the fixed asset register means the ledger and the physical record are reconciled from the same place rather than annually in a rush.