Hi, I was wondering why the cost of building an extension to the freehold buildings is not considered an expense and therefore charged to the P&L. Is this because we do not know enough about how the extension was funded (ie. credit) or is there something to do with the fact it relates to non-current assets? Therefore it would make more sense to update the valuation in the balance sheet. Jamie
It's because the extension is a non-current asset. The cost of building the extension is added to non-current assets as it's an asset that will be used in the business for a number of years. The cost will be recognised on the P&L, but this is via depreciation over the asset's useful economic life. The way the purchase of the asset was funded doesn't affect the treatment of the asset - if the company has purchased an asset that's going to be used in the business for >1 year, then it's a non-current asset. If it's a short-term asset like stock then the cost is usually recognised on the P&L in full once the asset is used up - in the case of stock, it's under cost of sales (ie stock used = opening stock + purchases - closing stock). I hope that helps!
