Dealing with capitalised costs
Instead of purchasing non-current assets from third party suppliers, a firm may choose to itself construct or erect an asset for use in its own business. In these cases, costs and expenses which would otherwise be revenue in nature should be capitalised. Capitalised costs will not appear in a firm’s statement of profit or loss and hence materials and labour costs will be understated in this account, notwithstanding disclosure by way of a note.
During the period, a new warehouse was constructed by the firm’s workforce for the firm’s own use at a cost of £4m. The materials cost of the construction was £1m and the labour cost assigned to the construction came to £3m. These costs were capitalised and hence do not appear in the above statement of profit or loss. A value added statement brings these costs in to view because the construction is part of the value created by the firm during the period.
Workings and notes
Bought in materials, goods, and services
Purchases of all materials, goods, and services whether or not capital or revenue but excluding depreciation.
To pay employees
All wages and employment on-costs including labour costs assigned to the construction of the new warehouse.
The capitalised cost of materials (£1m) and labour (£3m)
Closing inventory minus opening inventory. This represents additional investment in inventory if positive or disinvestment in inventory if negative.
The total of the depreciation charges shown in the profit or loss statement. This is a measure of capital consumption during the period. In the national accounts, the government may substitute its own figure for a firm’s measure of capital consumption.
Link to the national income accounts
The total of the adjustments will be shown as an investment activity in the national income accounts where it will be denoted as I