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Assets include resources that companies use to generate revenue. These assets may come in different forms. For most companies, fixed assets are essential in providing a base for operations. However, these differ from other assets as they may require continuous expenditure. Sometimes, this expenditure may fall under betterment.
Betterment in accounting is a term often associated with fixed assets. However, recording this amount may not be as straightforward. Before discussing the accounting treatment, it is crucial to understand what betterment means.
What is Betterment in Accounting?
Betterment in accounting is not very different from its original meaning. The term “betterment” means the act or process of improving something. Within accounting, it applies to companies spending money on their operations to enhance productivity and efficiency. Therefore, a betterment is an improvement to fixed assets to get more use.
Companies continuously spend on their fixed assets for several reasons. The most common ones include higher productivity, increased efficiency, reduced wastage, and longer useful life. In either case, the underlying fixed asset becomes better than before. When this happens, a betterment is said to have occurred for the fixed asset.
What is the accounting for Betterment in Accounting?
The accounting treatment for betterment in accounting is complex. The definition of betterment may help simplify it. As stated above, betterment involves an improvement in the asset. Therefore, not every expenditure toward that asset counts as betterment. This difference comes from capital and revenue expenditure which differ based on some criteria.
Accounting for betterment in accounting involves capitalizing and expenditure toward improving an asset. As stated above, this may include increasing productivity or useful life. If the expenditure is a capital expense, the company must capitalize it. Further implications of this accounting treatment may consist of recording depreciation on the capitalized amount.
In other cases, companies must write off expenditures made toward an asset. It happens when it is a revenue expenditure rather than capital. However, companies may also write off a capital expense if the value is insignificant. The threshold for that may differ for various industries or companies.
What is the journal entry for Betterment in Accounting?
When a company recognizes betterment in accounting, it must identify the account to which the expense relates. For example, if a company spends on increasing a forklift’s useful life, it must establish whether it is in the machinery or vehicle category. Once identified, the company must record the betterment in that account as a debit. On the credit side, the company must include the relevant account.
Therefore, a typical betterment in accounting journal entry may be as follows.
|Dr||Fixed assets account|
|Cr||Cash or bank or account payable|
If the expense does not improve the underlying asset, the treatment for betterment in accounting isn’t relevant.
A company, Blue Co., has a plant where it manufactures its products. The plant had a remaining useful life of 3 years until the company spent $10,000 cash to increase it to 5. Since the expenditure involved improving the underlying asset, Blue Co. recognized it as a betterment. The journal entry for the transaction was as follows.
Betterment in accounting refers to an expense toward improving an asset. This improvement may come in various ways, as listed above. However, revenue expenditure does not count as a betterment. Companies must record the expense by capitalizing it in the relevant account. Further accounting implications may involve recording depreciation, etc.
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