Determining/Recording the Cost of Operating Assets

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 19, 2023

The fundamental concept of accounting for operating asset acquisitions calls for them to be recorded at their original cost. Three sub-concepts guide practice:

  • The cost must be incurred in order to make the asset ready for use
  • The cost must be necessary
  • The cost is measured as the value sacrificed by the firm

In this article, considerations related to each of the above sub-concepts are discussed in more detail.

Making the Asset Ready for Use

The goal of identifying the costs of making an asset ready for use is to distinguish the amounts that produce benefits only in the current period from those that result in future benefits.

The costs in the first group are treated as expenses of the current period, but those in the second group are capitalized. That is to say, they are recorded in a permanent account and expensed in future periods.

The costs of making the asset ready for use include such things as obtaining the legal right to use it (either by purchase or lease), transportation to the place in which it will be used, installation, testing, and breaking in.

To the extent that these costs can be identified and measured, they should be debited to the asset account rather than an expense account.

Therefore, it is noteworthy that while most costs can be identified fairly easily, others are more complex.

For example, the costs of training personnel to operate new machinery may be regarded as part of the process of making the machine ready for use. However, because this relationship is not reliably determinable, these costs should be expensed.

In practice, there are many similar ambiguous areas where judgments must be applied. In these cases, it is not fruitful to attempt to specify how each should be treated.

Whatever treatment the accountant decides to select, it should be applied consistently while considering materiality.


Judgments about the necessity of costs are usually fairly obvious. However, there are costs that lie in the gray area between convenience and necessity. Some examples are:

  • Insurance in transit
  • Special costs incurred for express shipping
  • Remodeling of facilities prior to installation
  • Provisions for operator comfort and safety
  • Repair of accidental damages that occur during installation

Arguments can be presented to support treating each of these gray-area costs as either necessary or unnecessary costs.

Unless an official body undertakes the resolution of what constitutes necessity, practices will not be uniform.

In such cases, accountants should apply judgment while considering the principles of consistency and materiality.

Value Sacrificed

In addition to identifying which costs are to be capitalized, accountants must determine the dollar amount to be recorded.

There are five general acquisition situations that call for special consideration of their measurement problems:

Determining/Recording the Cost of Operating Assets FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.