DEFINITION AND DISTINCTION OF THE TERMS – HISTORICAL COST
Definition:
Historical cost in the context of plant and machinery refers to the original cost incurred to acquire or construct the asset at the time of its acquisition or construction. It includes all expenditures necessary to bring the asset to its present condition and location for its intended use.
Distinction in India:
In India, plant and machinery are tangible assets used by businesses for production or service delivery. The distinction between these terms concerning historical cost lies in their nature and purpose:
- Plant:
- In Indian accounting, “plant” typically refers to machinery, equipment, and apparatus used in manufacturing or production processes. This includes items such as tools, fixtures, and vehicles used in the production process.
- Plant assets are typically depreciated over their useful life to allocate their cost over time, reflecting their gradual wear and tear and obsolescence.
- Machinery:
- “Machinery” specifically refers to mechanical devices, engines, and equipment used in various industrial processes or operations. This includes items like generators, engines, and heavy equipment used for specific purposes.
- Similar to plant assets, machinery is subject to depreciation to account for its gradual loss of value over time due to wear and tear and technological advancements.
Complete Information:
When considering historical cost in the context of plant and machinery in India, it’s essential to include the following information:
- Original Cost: The initial amount paid or incurred to acquire or construct the plant or machinery asset.
- Associated Costs: All expenditures directly attributable to bringing the asset to its present location and condition, including transportation, installation, and testing costs.
- Adjustments: Any adjustments made to the historical cost over time, such as additions, improvements, or restoration costs, should be documented and included.
- Depreciation: The method and rate of depreciation applied to the historical cost to allocate its value over the asset’s useful life. In India, various methods such as straight-line, diminishing balance, or units of production method may be used for depreciation calculation.
- Regulatory Compliance: Ensure compliance with relevant accounting standards and regulations in India, such as the Companies Act and Indian Accounting Standards (Ind AS), regarding the recognition, measurement, presentation, and disclosure of plant and machinery historical costs.
By providing this complete information with clear distinctions between plant and machinery, businesses can accurately account for these assets’ historical costs in their financial statements, ensuring transparency and compliance with accounting standards and regulations in India.
