Accounting treatment

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This query is : Resolved

VINITHA RAJESH (Querist)

16 September 2010 A company purchases raw materials and assemble them to form a new product. This final product is given on rent to the customers. The final product may or may not be sold. i.e, if there is demand for the goods, they will sell. But the main object of the business is to give on rent. The final product can be used for 3-4 years and at the end of its life will be disposed off as scrap.

Can we treat these goods as stock in trade. If not, how do we treat them.

sudhakar ca cwa

sudhakar ca cwa (Expert)

16 September 2010 in my opinion AS-13 will apply so better treat them as investments. (any asset which is used for generating income like rents, captial appreciation etc)

or in another way treat them as fixed assets.

other views also accepted

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

18 September 2010 My view, it is need to be treated as fixed asset

shakuntala chhangani

shakuntala chhangani (Expert)

21 September 2010 Hi Vinitha, as per AS 2, inventory includes RM held for use, WIP and finished product held for sale. As mentioned by u, the main object of the co. is to give it on rent and co. does not intend to sell it, it can not be called inventory. Further even though its life is 4 years, it can not be called a fixed asset because as per AS 10 fixed asset is "an asset held for producing goods or providing services and is not held for sale in the ordinary course of business."
Now, switch over to As 13. It defines investments as " assets held by an enterprise for earning income by way of dividends, interest and rentals, capital appreciation or other benefits to the investing enterprise"
So the asset in question should be classified as investment as here also, the purpose is to earn rentals.
Regards, CA Shakuntala Chhangani

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