Effect of any Addition or Extension to the Existing Asset

Concept First

When a business spends money to add to or extend an existing asset, that spending is not a routine repair. It is a capital expenditure — it increases the asset's capacity, efficiency, or useful life. The key accounting question is: how should this additional cost be depreciated? The answer depends on whether the addition becomes an integral part of the original asset or retains a separate identity.

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Core Rules (AS-6 Revised)

The accounting standard lays down three clear rules for additions and extensions:

• Integral addition: If the addition becomes an inseparable part of the existing asset, it should be depreciated over the useful life of that asset. In practice, this usually means using the same depreciation rate as the original asset.

• Same rate option: The depreciation on such an integral addition may also be provided at the rate applied to the existing asset — this is the most common treatment.

• Separate identity: If the addition retains a separate identity and can be used even after the original asset is disposed of, it must be depreciated independently based on its own useful life.

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Accounting Treatment

The journal entry for capitalising an addition is:

The asset account now carries the original cost plus the cost of the addition. Depreciation is calculated on this total amount (or separately, depending on the nature of the addition).

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The textbook's Illustrations 10 (M/s Digital Studio) and 11 (M/s Nishit Printing Press) on additions and extensions now live in this chapter's Illustrations & practice tab, alongside their full solutions.

Distinction to Remember