Home > Accounting Entries > Assets > Property, Plant and Equipment > Machinery
Definition:
Machinery is a movable capital asset which is used in process of production of goods which are consumed or sold by business during their ordinary course of activity. These kind of equipment are mostly present in the books of manufacturing facilities. Machineries can be either purchased or constructed by the business. It may be a lot of time to build machinery and thus, costs incurred during the period is accounted as Capital Work-In-Progress and once the project is completed, the same needs to be capitalised in the financial statements.
These equipments can be owned or leasehold. In case owned, it can be a substantial part of the assets on the financial statements. Leasehold machineries are accounted as a component under Right-To-Use. Depreciation can be applied based on various methods which can be straight line, reducing balance, based on usage, shift based, etc.
Costs incurred during the trial run of the machinery is eligible for capitalisation. Expenditure incurred until the machinery is installed and begin to use for business purpose can be capitalised. Taxes and duties which are refundable or allowed for adjustment are not eligible for capitalsation.
Accounting Entries:
Initial cost for purchase/construction:
Machinery A/c DR
Cash/Bank A/c CR
Amount: Purchase price of the machinery.
Capitalsation of Machinery expenditure till date:
Machinery A/c DR
Capital Work-In-Progress A/c CR
Amount: Costs incurred and parked in Capital WIP A/c.
Subsequent expenditure resulting in increase in efficiency:
Machinery A/c DR
Cash/Bank A/c CR
Amount: Costs incurred on subsequent expenditure.
Subsequent expenditure not resulting in increase in efficiency:
Repairs and Maintainence A/c DR
Cash/Bank A/c CR
Amount: Costs incurred on subsequent expenditure.
Depreciation expense (periodic basis):
Depreciation Expense A/c DR
Accumulated Depreciation A/c CR
Amount: Depreciation expense to be calculated according to the accounting policy followed by business.
Sale/Disposal of Machinery:
Cash/Bank A/c DR
Loss on Sale A/c DR
Accumulated Depreciation A/c DR
Machinery A/c CR
Gain on Sale A/c CR
Amount: If the sale price > net book value of machinery, then gain. If the sale price < net book value of machinery, then loss.
Net book value = Original value of machinery (-) Accumulated depreciation as at sale date.