 Hello and welcome to the session in which you would look at the concept of capitalizing versus expensing. What is the big picture? Well, the big picture is this, when a company spends money, they have to decide whether they will need to expense this expenditure when they incur this cost or whether they need to treat it as an asset. Simply put, if they treat the expenditure, the cost as an asset, the term is called capitalizing, and that's the term of capitalizing, it means treating the cost as an asset. And when the cost is treated as an asset, it goes on the balance sheet and obviously it provides future benefit. That's the concept of capitalizing. Expensing, if we incurred, let's use a number, $5,000. If we expense this $5,000, well, that's expensing, obviously, it goes on the income statement and it affects profit immediately. The profit is affected. So the question becomes, how should we treat this $5,000? Well, this issue arises when it comes to property, print and equipment, subsequent to the acquisition of property, plant and equipment. So you do have already a property, plant and equipment on the books, like a building, a machinery, a vehicle, then you incur additional cost. How do you treat this additional cost? Do you expense it or do you treat or do you capitalize it? That's the question. Now, a notorious company known for abusing this is a company called WorldCom that no longer exists. They cook the books by $3.5 billion. Simply put, what does that mean? If we're looking at what I'm talking about here, they spent $3.5 billion. They should have expensed this $3.8 billion. What they did is they treat it as an asset. And as a result, they deferred the profit. And as a result, they reduced their expenses by $3.8 billion. So this company is known for abusing the rules for capitalizing versus expensing. Now, when do we capitalize? When do we expense? Let's look at the rules a little bit more specifically. If the expenditure provides greater future benefit, future value, so the cost we are incurring, it's improving the life of the asset. It's increased the life of the asset or increase the quality of the product or enhance the quality. If it meets any of these criteria, we are going to capitalize the expenditure. If the expenditure maintain a given level of service or maintain the operating condition of the asset, for example, looking at a car, for example, you need to change your oil on regular basis. You need to change your brakes on regular basis. You need to change your tires on regular basis. So what do you do with all these expenditure? Let's assume it's a delivery truck. Well, let's talk about the delivery truck and you are changing oil, brakes, tires, tune up. Well, all these are expense because they are maintaining the operating condition of the truck. Let's assume on the other side what you did is you added a lift, add a lift to the asset, to the truck. Now the truck can deliver more, can lift more units. Why? Because it has this additional feature, a lift. Maybe it's going to enhance the quality of the service. Well, as a result, we will capitalize the lift. However, any expense to maintain the truck normal operating condition is considered an expense. Now this concept is easy to learn in the real world. I'm sorry, on the contrary, easy to learn on the books. It's not clear cut in the real world. In the real world, what happened, a lot of companies, they have a policy. For example, any amount below, depending on the size of the company, any amount below 10,000, they will always expense it. Okay, they will have a policy like this. And any amount above 10,000, we will determine whether it's expense or capitalize. Again, depending on the size of the company, maybe it could be $500 or whatever that amount is. So the point is in the real world, you have many, many situations where it's not clear cut. This topic is covered in intermediate accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course, I'm a useful addition to your CPA review course. I explain the material differently. I explain the concept. I explain the theory behind the concept. And as a result, I can help you understand the material better. Your risk is one month of subscription. Give it a try. If you like it, you keep it. If not, well, that's your risk. And that's your return. But the risk return is pretty straightforward. I can help you add 10 to 15 points on your CPA exam. If not for anything, take a look at my website to find out how well or not well your University of the Wing on the CPA exam. This is a list of all my courses that I have, including lectures, multiple choice through false questions. My CPA supplemental material are lined with your Becker, Wiley, Roger, Gleam. I also provide you access to all the AI CPA previously released questions, almost 1500 questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter, and Reddit. Let's take a look into the different types of expenditures. Let's dig a little bit deeper into this. Well, we have repairs. Under repairs, we have ordinary repairs and major repairs. When the question says it's an ordinary repair, it means expensive. It means it's maintaining the current operating cycle of the asset. So ordinary repair are expensive. Ordinary, sometimes they call them minor. Minor or ordinary, basically the same thing. If the repair is considered major, and a major repair could be something like an addition, like, for example, adding an air conditioning system to an office building, improvement, for example, replacing your concrete floor with a wooden floor, or reconsider the replacement, for example, replacing the pipes in the plumbing system from ironing to plastic. Those are considered major and for major, we capitalize. We treat them as an asset. Now, how do we treat them? We capitalize them. We don't expense them. So how do we do so? Well, if the carrying value is known, if the carrying, for example, if the carrying value of the improvement or the replacement is known, because we are replacing the wooden floor, if the carrying value is known, we remove the old asset, remove its accumulated depreciation, recognize again or a loss. Usually, for example, maybe the pipes, what we have sometimes called something called cost segregation. So on a building, they account for the pipes separately from the building. This is called cost segregation. If that's known, if it's known, you remove the old asset and you replace it with the new one. So we have again and a loss. If the carrying value is unknown and the life of the asset is extended, if the life is extended, but the carrying value is unknown, we debit accumulated depreciation of the main asset, which is reducing what we do is we reduce accumulated depreciation, because remember, accumulated depreciation has a credit balance. We're going to remove it. We're going to kind of reduce the not remove it, reduce accumulated depreciation and credit, whatever we spend, money, material, whatever we spend, that's the corresponding credit. If the quality and quantity is enhanced, we debit the assets of who are dealing with the building, we increase the asset itself, increase the asset itself. Those are specific rules. Sometime what happened, the company have rearrangement or reinstallation of certain assets. For example, movement of a machine from one location to another to facilitate greater future production. And this happened in manufacturing facility. If you're going to enter expenditure, if the amount of the expenditure is immaterial, you expense it, or it cannot be separated from regular operating cycle at six months. But if the rearrangement and the reinstallation is considered material, and it's providing greater future production capacity, then those arrangements are capitalized. As I said at the beginning, this is easy to learn in a classroom for the CPA exam. But in the real world, it's much easier to apply. I would like to invite you. The best way to learn this is, again, to go to my website, farhatlectures.com and work multiple choice and examples to further solidify this concept. Again, on my website, I don't replace your CPA review course. If you decided to subscribe, I enhance it, like enhancing, giving you better value of your CPA review course. I'm a useful addition to your CPA review course. I don't replace your accounting course. I make your accounting course much better, much easier to understand. Again, your risk is one month of subscription. Give it a try. Your CPA exam is a lifetime investment. Don't shortchange yourself. Throw everything in it, add it, put it behind you, focus on your career. Good luck, and it's worth it.