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Journal entry for software renewal charges

Soumya (Senior Accounts Executive) (235 Points)

29 June 2016

Dear All,

Can any one help me to know what is the journal entries for software renewal fees of Rs.2,500/-.

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14 Replies

Harshit Kabra (INVESTOR) (Student CA final) (1113 Points)
Replied 29 June 2016

software renewal charges should be capitalize as since obtaining licence/renewal license is an capital expenditure hence it will be as -

said asset acct dr 2500

to Bank acct cr 2500

or if it is purchased from vendor which u maintain records, entry will be

Asset acct dr 2500

to vendor 2500

Vendor acct dr 2500

to bank acct cr Rs. X

to discount acc Rs. 2500-x

Shubham Gupta (Business Consultants) (2077 Points)
Replied 29 June 2016

I think as the the software is usable for one year and become useless if not renewed, so the cost of that should be treated as revenue expenditure. Similrly the benifit of renewal is for one year so the same also to be treated as revenue expenditure for that year.

1 Like

Harshit Kabra (INVESTOR) (Student CA final) (1113 Points)
Replied 29 June 2016

I appreciate mr shubham gupta in case of tenure of licence is 1 yr. but in case of more than 1 yr say 5 yr or 10yr then should be amortized as because -

expenditure on purchase of licence for the computing software make the assessee owner of such asset , hence he can obtain enduring benefit from such licence in his name , so thats all he has acquired an intangiable asset , such intangible asset should be amortized over the years.

Rahul (Student CA Final ) (30 Points)
Replied 29 June 2016

It should be capitalised. Asset will be debited and vendor shall be credit. If paid cash or in case of bank payment, cash/bank shall be credit. Moreover as per income tax act, it will be depreciated @ 60% annually if used for 182 days or more. Else 30% depreciation shall be levied.

CA shanky pahoja (accountant) (615 Points)
Replied 29 June 2016

mr. rahul as per income tax act software is covered under the defination of royalty and no depreciation is chargeble. exp is fully allowed.

and for passing entry following should be considered to ascertain wheter it is a revenue exp. or capital-

whether it is recurring exp.

whethet future economic benifits are availabe.

JAGJIT KASHYAP (TAX CONSULTANT) (109 Points)
Replied 29 June 2016

As mention clearly in question that, it is fee for renewal, that means there is no assets acquired/created because it is covered under "End User Licence Agreement (EULA)" and it is just expenditure.

Explanation of EULA with reference to Madras High Court ruling in Case of "Infotech Software Dealers Association vs. UOI".

The term of EULA indicated that the dominant intention of parties whereby the developer retained the copyright of each software, be it canned packaged or customized, and only the right to use with copyright protection was transferred to the subscribers or the members. The High court opined that in the transactions taking place between the members of ISODA with the customers, the software is not sold as such, but only the contents of data stored in software are sold which would only amount to service and not sale.

Therefore it should be treated as expenditure and not as capital expenditure.

Further, As per AS10-Accounting for Fixed Assets 'Whenever any expenditure is incurred, which improve performance of assets, beyond standard should be capitalized, such value should be material.

As no asset was acquired/created earlier therefore is no question of improvement of assets and that is revenue expenditure.

The view express by Mr. shanky pahoja is correct as per Explanation 4 of section 9 of Income Tax Act, 1961 (w.e.f. Finance Act 2012).

Accounting Entry.

Software Renewable Fee A/c Dr. XXX

To, Cash/Party A/c XXX

4 Like

NARENDRA SAHOO (3 Points)
Replied 29 June 2016

total software renewal charges Will be treated as revenue of the validity period is with in the same financial year

Soumya (Senior Accounts Executive) (235 Points)
Replied 29 June 2016

It is a renewal for one year hence it

KUMAR GAURAV (STUDENT) (25 Points)
Replied 30 June 2016

What I observed here is that many of the repliers are CA/or CA final students..that means they have studied the same syllabus and gain the same knowledge as there is only one institute (ICAI) that regulates all these..but what I found here is that they all have different concepts/different answer/different view on the topic..why so?

Soham (Learning ) (534 Points)
Replied 30 June 2016

Software renewal should be trated as Revenue Expenditure as it is not adding any value addition to the system where its productivity will extraordinarily will be increased with respect to busniess .