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Komp provides three sales managers model of laptops to facilitate their work.

The Director is puzzled as why these laptops, being similar to those sold to the customers are not show as inventory.

When entity makes expenditure, the benefits from the goods or services acquired either are obtain in the current period or are expected to be obtained in future periods. If the benefits are obtained in the current period, the costs of the goods or services are expenses. If benefits are expected in future periods, the costs are assets in the current period and the expenditures are said to be capitalized. Although, inventory and prepaid expenses also are assets because they benefit future periods, the term capital assets is usually taken to mean long-live assets that provide service for several future years.

Capital assets can usually be thought of as a bundle of services. In the case of Komp Sdn. Bhd., the cost of laptops that been provided to three sales managers, should be matched with the revenues that are obtained from its use in these future periods. The general name for this matching process is amortization. The portion of the assets cost that is charged to a given period is an expense of that period. Capital assets are therefore essentially similar to a prepaid insurance policy or other prepaid expenses. It is initially recorded as an asset and is converted to an expense in one or more future periods. The difference is that the life of most capital assets is longer than that of most prepaid expense.

There are few types of long-lived assets such as a building or a machine. An intangible asset, such as patent rights or copyrights, has no physical substance. Related to the case Komp Sdn. Bhd., the reason why the laptops that been provided to the Three sales managers to facilitate their work, not been recorded as inventory because those laptops are long-lived tangible assets.

He is also unhappy that these laptops have to be depreciated. He said, I dont think we should depreciate because it understands our companys profits.

With the exception of land, most of plant and equipment have a limited useful life. That is, they will provide service to the entity or a limited number of future accounting periods. A fraction of the cost of the assets is therefore properly in which the assets provides services to the entity. The accounting process for this conversion of plant and equipment capitalized cost of expense is called depreciation.

Therefore in this case, those laptops have to be depreciated because the costs of those laptops consumed by Komp Sdn. Bhd. during on accounting period are expenses. Those laptops provide benefits to the entity over finite number of accounting periods, and a fraction of their original cost therefore, must be charged as an expense of each of those periods.

However, do we need depreciation to set aside a certain amount of funds to replace the older laptops?

Although this is not common, Komp Sdn. Bhd., do need depreciation to set aside a certain amount of funds to replace the older laptops. This purpose is called funding deprecation. This transaction is completely separate from the accounting process of recording depreciation. The operating expense associated with the use of fixed assets. If depreciation is funded, cash or securities are set aside in such a way that they cannot be used in the regular operation of entity.