Leasehold Improvements: Accounting Treatment and Depreciation


Leasehold Improvement can be described as the changes that are made to the leased or rental property in order to ensure that it is best suited for the purposes of the tenant.

During the course of the lease agreement, there might be a number of changes that the tenant requires in order to bring the property to its proper usage.

When making changes in the structure, or the building, it is important to consider the fact that leasehold improvements are mostly undertaken by the property owner, and therefore, they need to be properly accounted for in order to get the best possible results.

However, there is no hard and fast rule that leasehold improvements need to be solely undertaken by the property owner only. In certain cases, the tenant can also provide for these expenses, after bringing them to the notice of the property owner.

As a matter of fact, it is also highly important to ensure the fact that these leasehold improvements are often significant in terms of the financial value, and therefore, they need to be properly accounted for in order to make it best suited to both parties.

Some examples of leasehold improvements include paintings, replacement of fixtures and fittings, and other miscellaneous expenses that might be relevant in this regard.

Accounting for Leasehold Improvement

Leasehold Improvements can be considered to be either an asset or an expense. In the case where leasehold improvements are considered to be a fixed asset, there is a need to ensure that the expense meets the capitalization criteria.

During the course of the tenancy period, there is a lease agreement that is drawn which specifies which alterations or changes can be made within the structure of the property and if those expenses can be capitalized.

Normally, there is a capitalization limit that is set on the expenses that are incurred by the tenant, and these expenses, if have a useful life of more than one year, are normally considered to be capital expenditures.

Therefore, if the investment in leasehold improvement is considered to be a fixed asset by the tenant, then it is amortized over the useful life of the improvement.

However, it must be noted that upon the termination of the lease contract, all the leasehold improvements are considered to be the property of the property owner, unless stated otherwise.

In the case where leasehold expenses are incurred by the tenant, and they are capitalized, the following journal entries are shown in the financial statements:

Dr. Expense – Leasehold Improvement Expense$500,000
 Cr. Cash$500,000

Similarly, in the cases where the tenant records leasehold improvements as a capital expense, the following journal entry is made:

Dr. Leasehold Improvement (Non-Current Assets)$500,000
 Cr. Cash$500,000

Are Leasehold Improvements Fixed Assets?

A leasehold improvement is only classified as fixed assets if they are duly capitalized, as per the capitalization threshold that is general acceptance. In most cases, the general guidelines for leasehold improvements are as follows:

  • The benefits of the leasehold improvements are classified to last for more than one year. In other words, the economic benefits resulting from the leasehold improvements are likely to span a period of more than 1 year (they are considered to be long-term), as opposed to short-term.
  • Leasehold improvements that are substantial, and significant in nature are often capitalized. This is also because of the fact that expensing them in a single year might often take an uncalled-for strain on the balance sheet, because of which they capitalized, and then duly amortized over the course of time.
  • Leasehold improvement expenses, which are one-time, and non-recurring are often capitalized. Regular leasehold improvements are not capitalized and are treated as expenses in most cases.


The general depreciation rule across all leasehold improvements can be categorized into three broad categories, which are as follows:

  • Useful Life Basis: In the case where the leasehold improvements are incurred, they are assumed to have a useful life of around 5 years or 10 years. Depending on the useful life of the asset, they are amortized and expensed every subsequent year.
  • Lease Term Basis: In the case where the tenant has borne for capitalized expenses, it can be seen that the expense is depreciated over the useful life of the lease agreement. If a lease lasts for a period of 10 years, then the capitalized expense will be depreciated or expensed over a period of 10 years.

What are leasehold improvements on a balance sheet?

When the leasehold improvement meets the company’s criteria to capitalize as fixed assets, then in the balance sheet, leasehold improvement is to recognize at costs. Then the leasehold improvement will be reported at the net of depreciation.

A leasehold improvement is not showing the gross amount on the balance sheet and if we want to see the gross amount, we need to check the note of financial statements. The depreciation expenses of the leasehold improvement will be recognized as expenses in the income statement.

Repair and Maintenance Expense – Overview, Accounting Treatment, Journal Entries, and Example


During the normal course of business, there are certain routine expenses that are considered unavoidable. They are part and parcel of the operations of the company, and therefore, need to be paid by the company in order to ensure that there are no bottlenecks that hinder the performance of the company.

Repairs and maintenance expense are one such expense that is incurred by the company on a regular basis.

Repairs and maintenance expenses basically include expenses that are incurred as a result of the machinery or other equipment within the company that needs to be kept in proper running condition with the company.

These expenses are considered to be unavoidable and are necessary to ensure smooth functioning of operations without any machine breakdowns, and any relevant hiccups.

In this regard, these expenses are mainly categorized as periodic costs. They cannot be associated with one particular product, and the expense for repairs and maintenance highly varies from one year to another.

By the nature of repairs and maintenance-related expenses, it is seen that it is normally considered to be an expense that is a routine expenditure, and it cannot be predicted before it actually happens.

With routine maintenance, the amount is still predictable, but with unforeseen machine breakdowns, predicting the amount for these expenses is relatively hard.

Therefore, this is the amount that is normally deducted from the petty cash of the company, since it is mostly not very substantial. However, it still needs to be accounted for in order to record those expenses in a proper manner.

Accounting Treatment for Repairs and Maintenance Expense

Repairs and maintenance expense is considered to be one of the operational expenses of the company, and therefore, it is categorized as a normal expense.

Repairs and Maintenance expenses can either be planned or unplanned. Planned repairs and maintenance expense means that companies now need to be incurred and carried out over the coming year.

On the other hand, unplanned repairs and maintenance expenses are expenses that occur on an unforeseen basis. For both of these types of repairs and maintenance-related expenses, they are treated and categorized in the same manner.

Therefore, repairs and maintenance expense is mainly categorized as an expense account. The expenses are debit in nature, and therefore, as the amount increases, the relevant amount is debited in the Profit and Loss Account.

Normally, organizations settle this amount in cash, and therefore, they barely have any prepaid or accrual balance at the year-end. However, in certain cases, organizations do end up having either prepaid or accruing repairs and maintenance expenses.

In the case where there are prepaid repairs and maintenance expenses, it means that the company has paid in advance, or has paid an excess amount to the supplier. In that particular case, it is treated as a Current Asset in the Balance Sheet.

On the contrary, it can further be seen that in the case where there is a pending balance of Repairs and Maintenance that needs to be settled before the year-end, there is a need to include that as Current Liabilities in the final year statements.

Double Entry for Repairs and Maintenance Expense

In order to record the repair and maintenance expense when it is incurred, the following journal entry is made:

Repairs and Maintenance Expensexxx
    Cash xxx

Since the repairs and maintenance account is paid in the year where it is due, it is supposed to be expensed and written off at the end of the year.

Therefore, in order to settle the amount that has been carried out as an expense at the end of the year, the following journal entry is made:

Income Statementxxx
       Repairs and Maintenance Expense    xxx


In order to explain and further classify the treatment of repairs and maintenance expense, the following illustration is provided:

Kemp Co. is a manufacturing concern. Over the course of the year, they incurred $25,000 as repairs and maintenance expenses.

However, they got into an agreement with the supplier that they would pay $15,000 as repairs and expense cost upfront, and the remaining amount would be settled in the next year.

In order to record the above transaction in the financial statements, the following transactions need to be made:

Repairs and Maintenance Expense25,000
    Cash 15,000
Current Liability 10,000

In the same manner, it can be seen that at the year end, the following journal entries need to be made:

Income Statement25,000
Repairs and Maintenance Expense 25,000

Building Improvement: Accounting, Journal entries, Depreciation


Building Improvement tends to be a major expense for organizations, as well as for private investors because they require a significant amount of finance to be invested in a line with the expense.

In this regard, it is also important to properly categorize building, and building improvements so that there is clarity regarding the respective categorization in this regard.

The building can simply be defined as a structure that is attached to the land, has a roof, is completely surrounded by walls, and is not considered to be mobile.

In the same manner, building improvements are categorized as capital expenditures that are targeted towards extending the useful life of the asset, or an expense that potentially increases the value of the building itself.

Therefore, these expenses are capitalized, not only because they are significant in nature, but also because of the fact that the foreseeable benefits resulting from building improvements have a foreseeable life of more than 12 months.

However, there are several different types of building improvement expenses that are incurred, and not all of the types of business expenses are categorized as capital expenditures.

In this regard, they are only categorized as such if they are able to meet the capitalization threshold criteria.

Accounting for Building Improvement

There are two categories of building improvements that are undertaken by companies. In this regard, it can be seen that building improvement can either be categorized as routine repairs and maintenance expense, or it can be classified as major structural changes within the organization.

For both the types of building improvement processes, it can be seen that the treatment is different.

The accounting treatment for building improvement processes can also be categorized into two broad categories: Capitalized Building Improvements, and Expensed Building Improvements.

Firstly, it can be seen that there are certain building improvement processes that are capitalized.

This means that they are treated as fixed assets, and not expensed. In this regard, it can be seen that the expense should ideally meet the capitalization threshold criteria.

Capitalization threshold criteria include a number of things, including the nature of the expense incurred, the financial outlay of the process, as well as a couple of other things that need to fit in the criteria for building improvement processes.

Therefore, in the case where these criterion are met, the building improvement expense is capitalized.

The journal entry in this case is as follows:

Building Improvement (PPE)xxx
     Cash xxx

In the same manner, in the case where building improvement expense does not fit the threshold criteria, it can be seen that the charges that are incurred are expensed on the Income Statement. In this regard, the following journal entry is made:

Income Statement – Building Improvementxxx
     Cash xxx

Are Building Improvements Classified as Fixed Assets?

Classification of building improvement as fixed assets is primarily contingent on the ability of those expenses to be categorized as per the capitalization threshold.

This is because it makes logical sense to add them in fixed assets in the case where there is an absolute certainty that those fixed assets are going to add substantial value to the price of the building, or there is a certainty that the advantages yielded from the building improvement are going to last for a considerable time period.

Therefore, building improvement costing is only classified as a fixed asset if these criteria are met, otherwise they are just expensed as regular repairs and maintenance expenses in the Income Statement.

Depreciation for Building Improvement – Expenses

The depreciation of building improvement is simply contingent on its classification as fixed assets.

In the case where organizations are able to classify these expenses as fixed assets, then the amount is simply added to the fixed asset value, and it is subsequently depreciated using the depreciation method previously used for depreciating Property, Plant, and Equipment.

However, generally, it is seen that the depreciation of building or building improvement is carried out either using MACRS (Modified Accelerated Cost Recovery System) or the Alternative Depreciation System.

Building Improvement vs Leasehold Improvement

Building Improvement and Leasehold Improvements are often mixed and confused. However, it can be seen that building improvement is classified as an improvement that is carried out for the purposes of ensuring that the building dynamics, its property, as well its functionality change to accommodate the user and the owner of the particular building.

On the other hand, leasehold improvement basically incorporates making changes to the structure of the building in order to facilitate the particular tenant, to suit his needs.

Fictitious Assets: Definition, Example, and List


Fictitious assets can be defined as assets that are fake. They do not have a physical presence, and hence, these assets are not really assets in the true sense, but in fact, they are defined as assets that are mainly categorized as huge expenses or losses that occur within the company over the course of time, and tend to be unclaimed in the year in which they take place.

The main reason as to why these expense heads are treated as assets, and then expensed across several different years is the fact that this is considered to be a major expense for the business, and hence they are then spread across a number of years, as opposed to being treated as such during the course of one year only. Therefore, they are categorized as assets using journal entries that just convert expenses with a considerable value into assets.

Therefore, it can be seen that fictitious assets are intangible assets, with no physical existence. They are expenses that are treated as assets. Since they are not purchased by the company (with an intention of keeping them as assets), they have no realizable value.

They are continually amortized over the course of time, across a span of more than one financial year. The main reason for this particular categorization is the fact that these expenses, like assets, are expected to give returns over the course of more than one year.

However, since it is a considerable amount of money, recording them in one year altogether might have an adverse repercussion on the financials. Therefore, they are categorized as assets first, and then continually amortized over the course of time, as soon as the company is making profits, and it is certain that the company is generating a positive return.  


Fictitious assets may, or may not exist on the balance sheet of a particular company. However, the following illustration shows how fictitious assets work, and in what circumstances do companies treat expenses at fictitious assets.

Newton Co. got incorporated on 1st January, 2020. Upon incorporation, they paid $60,000 as incorporation charges. However, during the first year of operations, they were not able to make substantial profit.

They also incurred marketing promotional expenses of $40,000, in addition to a discount at which they issued shared. The total discount amount was $55,000. End of the year, Newton Co. decided to categorize all three expenses as fictitious assets. They are expected to earn profits from the next year, so they decided to amortize these fixed assets as soon as they are able to generate profits.

Difference between Fictitious Assets and Fixed Assets

The main difference between fictitious assets and fixed assets is the fact that fixed assets are mostly tangible in nature (except for goodwill). They normally have a realizable value, and they are subsequently expected to generate returns over the useful life of the assets. In the same manner, fictitious assets have no realizable value.

They are only placed on the balance sheet as per the amount that has already been paid. It cannot be depreciated, or sold once it is paid for. It carries forward from one year to the next, unless the amount is fully amortized over the course of time.

In the same manner, it can also be seen that fictitious assets do not drive a tangible value. Estimating the amount of value addition as a result of this particular transaction is questionable. However, in the case of fixed assets, the returns that are expected to be generated can be estimated and calculated well in advance.

List of Fictitious Assets

There are numerous different examples of fictitious assets. Some of the examples of fictitious assets are as follows:

  • Promotional Marketing Expenditures: Professional and promotional marketing is considered to be a significant investment for the company. For organizations that have considerable marketing budgets (mainly in the case of ATL Marketing), the benefits of such marketing campaigns are rendered over a period of more than one year. Therefore, they are categorized as fictitious assets, and then amortized over the period with which it is expected to return considerable value.
  • Preliminary Expenditures: Preliminary expenditures are expenses that occur in the initial stages of the business. This might include costs associated with incorporation, legal and licensing fees, as well as other expenses that are associated to bring the business in a running condition. These expenses are considered significant in nature, and therefore, they are often treated as fictitious assets, and then amortized over the forthcoming years.
  • Discount allowed on the issue of shares: In the case where the company issues shares at a discount, the discount amount is not considered as an expense (or a loss). Instead, it is considered to be a fictitious asset, and then it is expensed over the course of the year.

Land improvements depreciation

Fixed assets represent long-term assets used by companies and businesses in the generation of revenues and profits. There are several types of fixed assets that companies use, including property, plant, and equipment.

Since most of these assets require high-value investments, accounting standards require companies not to charge the cost of these assets in a single accounting period.

There are several reasons why companies don’t charge assets in a single period. Most importantly, it is because the matching principle of accounting requires companies to charge expenses in the period that they help generate revenues. It is why companies use depreciation to contribute to the value of fixed assets over a period of time.

However, there is still an asset that companies do not depreciate, land. The reason is behind it is that land has an infinite useful life. Other assets, in comparison, have a useful life after which they stop generating revenues for a company.

The only case where land is depreciable is when there are natural resources that companies can extract from it.

When companies purchase land, it may come with a building on it. Therefore, they need to allocate the cost between the land and building.

It is so they can depreciate only the building element and not the land itself. Sometimes, however, companies may also perform some land improvements, which can be depreciable.

What is the land improvement?

Land improvement refers to enhancements made to a plot of land to make it more usable. Usually, these improvements have a useful life and, therefore, are depreciable.

However, if a land improvement does not have a useful life or companies cannot estimate it, then the company cannot depreciate the improvement. Similarly, there are some costs that qualify as land improvements and some which do not.

For companies to consider expenditure on land as improvement, they must meet several requirements. Most importantly, the expenditure should be of capital nature and not revenue nature.

It means that any expense borne on land should enhance its quality, increases its useful life or increasing its value. Any regular maintenance work done to it does not qualify as capital expenditure.

That is the reason why expenditure such as demolishing an existing building and clearing and levelling the land do not qualify as capital expenditure.

Companies perform these actions as a part of regular maintenance and do not affect the value of the land. Demolishing a building also has an impact on the value of the building and not the land.

Other improvements to land, for example, adding elements to it can qualify as improvements. For instance, if a company installs drainage and irrigation systems, landscaping, parking lots, driveways, walkways, outdoor lighting, or fencing, it can recognize it as a land improvement.

Almost all these items have limited lives and, therefore, the company must depreciate them.

Accounting treatment

The accounting treatment of land improvements comes under the accounting standard for property, plant and equipment. Companies need to calculate all the costs that go into these improvements. However, they must ensure these expenditures are of capital nature.

The initial measurement of the cost of these improvements includes all costs involved in bringing the improvements into working condition.

Once companies measure the initial cost of the improvement, they can use the following journal entry to record the land improvement in their accounts.

DrLand improvementsx
CrCash or bankx

The land improvements represent a fixed asset for a company, which will appear in its Balance Sheet. On the other hand, any payment made against the installation of these improvements reduces the cash or bank balance of the company.

If the company obtains these improvements on credit or any other terms, it can modify the credit side of the double-entry.


Like any other depreciable asset, the accounting treatment for land improvements depreciation is straightforward. Companies need to start by establishing the cost of improvements.

In case they cannot calculate its value, they cannot capitalize it either. After determining the cost, companies need to estimate the useful life of the improvement.

The useful life of an asset can depend on several factors. However, it generally requires judgement. After establishing the useful life, the company needs to decide on the depreciation method to use for depreciating the land improvements.

Usually, companies have two options when it comes to depreciation techniques. These include the straight-line method and double-declining balance techniques.

The journal entry to record depreciation, after calculating it, is as follows.

CrAccumulated depreciationx

The above journal entry is similar to a depreciation recording entry for any other fixed asset.


The land is a non-depreciable fixed asset for companies due to its infinite useful life. However, land improvements with useful life are depreciable. Land improvements are any enhancement to land that increases its value. These improvements need to be of capital nature and not revenue nature.

Impairment of Assets

When a company or business acquires an asset, it records it in its financial statements at cost. After every accounting period, the company must also calculate and record a depreciation or amortization charge related to the asset. Sometimes, however, companies must recognize an impairment against the asset under various circumstances as well.

What is the impairment of assets?

Impairment of assets refers to the concept in accounting when the book or carrying value of an asset exceeds its ‘recoverable amount’. IAS 36 defines the recoverable amount of an asset as the higher of its fair value less cost to sell (or net realizable value) and its value in use. When an asset is impaired, the company must record a charge for the impairment expense.

The reason why companies record impairment to assets is to reflect their correct value in the financial statements. It goes in line with the prudence concept of accounting. Furthermore, any asset, whether tangible or intangible, can suffer impairment. Therefore, IAS 36 requires companies to record the impairment whenever it occurs.

Causes of Impairment:

There are many causes of impairment to assets. These causes can be internal or external. Companies must always identify them and evaluate whether they have resulted in impairment of their assets.

1) External factors

External factors can impact an asset’s value and result in impairment. External factors may include economic, social, technological, political, legal or environmental issues. Furthermore, if an asset’s fair value reduces in the market, it may also cause impairment to it. Similarly, changes in the market can also impact the company adversely, causing impairment to its assets.

2) Internal factors

Internal factors are straightforward to identify. Things that cause impairment internally include physical damage to the asset, causing a reduction in its value. Obsolescence of assets also results in impairment losses. Furthermore, if the company alters the way it uses an asset, it may impact its value in use and, therefore, its recoverable value. Lastly, if a company finds evidence that one of its assets is performing worse than anticipated or expected, it may be an indicator of impairment.

Scope of Asset Impairment

IAS 36 – Impairment of Assets has a wide scope and applies to all assets that companies use. However, it does not include assets that have specific standards that take care of impairment. Therefore, impairment of assets does not apply to the following areas of a company:

  • Assets arising from employee benefits.
  • Construction contracts.
  • Deferred tax assets.
  • Financial assets or instruments.
  • Investment property measured at fair value.
  • Assets classified as held for sale.

All these types of assets have a specific standard that addresses how companies should deal with impairment for them. Therefore, the standard does not apply to these assets. Other than these, the impairment of assets applies to all other assets within a company.

Journal entry

The journal entry to record impairment is straightforward. However, before recording the impairment loss, a company must first determine the recoverable value of the asset. As mentioned above, it is the higher of an asset’s net realizable value and its value in use.

Once a company calculates the recoverable amount of the asset, it must compare it with the asset’s carrying value.

If the carrying value of the asset exceeds the recoverable amount, then the company must recognize an impairment loss. The amount of impairment loss will be the difference between an asset’s carrying value and recoverable amount. The double entry to record an impairment loss is as follows.

DrImpairment lossx

The impairment loss becomes a part of the Income Statement and reduces the profits of the company. On the other hand, it also affects the Balance Sheet of the company. That is because it results in a decrease in the value of the asset that suffered the loss.


A company, ABC Co., has total assets worth $1 million after calculating the carrying value at the end of the accounting period. Among these, ABC Co. has a vehicle with a carrying value of $100,000, which has suffered physical damage. According to the company’s calculation, the vehicle has a net realizable value of $80,000 and a value in use of $75,000.

The recoverable amount of the vehicle is its net realizable value of $80,000, which is higher than its value in use. However, it is still lower than the vehicle’s carrying value of $100,000. Therefore, ABC Co. must record an impairment loss of $20,000 ($100,000 – $80,000). The double entry for recording the loss is as follows.

DrImpairment loss $  20,000
CrAsset $  20,000

After the loss, ABC Co.’s expenses will increase by $20,000, while its total assets would decrease by the same amount as well.


There are several advantages of impairment of assets. Firstly, it helps companies present a true and fair view to their stakeholders of the true value of their assets. Similarly, it can help stakeholders determine if a company might be facing any failures or damages and can be an indicator of their efficiency and effectiveness. Impairment losses can also help stakeholders determine if a company’s policies or decisions may have failed.


Impairment may also have several disadvantages. Firstly, it is difficult for companies to calculate a recoverable amount. It’s because obtaining a fair value or calculating the value in use of an asset are costly and, sometimes, inaccurate.

Similarly, while the standard shows how to recognize impairment losses, it does not give detailed information about the process that companies can follow.


Impairment is a crucial concept in accounting. Impairment losses come as a result of the carrying value of an asset being different from its recoverable amount. When companies detect an impairment, due to external or internal factors, they must recognize a loss immediately.