Capitalized borrowing costs are those added to the cost of acquiring an asset to bring it to the condition and location necessary for its intended use.
When a business purchases an asset which includes several assets such as land, land improvements, and buildings which have dissimilar depreciation rates, it needs to be able to allocate the total cost of the asset to its component parts. The relative fair market value method is one technique used to carry out this allocation.
Accounting distinguishes between capital improvements and repairs and maintenance to an asset. A capital improvement is treated as a capital cost and included on the balance sheet of the business, whereas repairs and maintenance are treated as expenses and included in the income statement for the year.
Capital expenditures and revenue expenditures are treated differently in accounting. Capital expenditure relates to expenditure on non-current assets, whereas revenue expenditure is expenditure relating to the day to day trading activities of the business.
A business will often purchase a number of long term assets for a single combined purchase price. In order to record the assets in the accounting records and to allow depreciation to be correctly calculated, the basket purchase price needs to be allocated in proportion to the fair market value of the assets.
A business buys networking equipment to the value of 12,000 and funds the purchase with a down payment in cash of 3,000 and the balance on credit terms form the supplier of the equipment.
The double entry bookkeeping is recorded using this equipment purchase compound journal entry.