Initial cost of PPE_ Why trade discount is not included?

MMufadhal4y ago

Hi, Since trade discounts on PPE may vary, why don't we add it back to the amount paid? instead of deducting it from the list price as usual. I mean it would make sense since every asset in one particular class of PPE would have different trade discounts that we purchased from different dates or suppliers. so to have some sort of consistency of the cost assigned. Thanks.

PP2-D2Tutor4y ago#1

Hi, We capitalise PPE at cost and if we have received a trade discount then the asset costs us less. We therefore capitalise at this lower cost as that is the cost to the business, being what we've paid. We wouldn't add it back to the amount we've paid as that effectively removes the benefit from the business of having paid less, resulting in higher annual depreciation charges. The benefit of the trade discount is seen through reduced depreciation charges in future years as we have capitalised at the lower amount, therefore reflecting the good stewardship of the business. Thanks

MMufadhal4y ago#2

Well understood. thank you so much.