10 January 2014
Q. amount recd from Govt. of rajasthan to a local body (muncipality) for construction of a boundry wall Rs. 60000. And cost of constructed boundry is 425000. Both transaction are in same year and both party are Govt. institution. what accounting treatment that I should give in books of accounts of muncipality. And which accounting standards are applicable on this
02 August 2025
For the **government grant received by a local body (municipality)** for construction of a boundary wall, here is the appropriate accounting treatment and applicable standards:
---
### 1. Nature of transaction:
* Municipality receives a **government grant of Rs. 60,000** towards construction of a boundary wall. * The **cost of the boundary wall constructed is Rs. 4,25,000**. * Both parties are government institutions.
---
### 2. Accounting treatment:
**a) Recognition of asset:**
* Record the boundary wall as a **fixed asset** at its **cost of Rs. 4,25,000**.
**Journal entry:**
``` Dr. Boundary Wall (Fixed Asset) Rs. 4,25,000 Cr. Cash/Bank or Creditors Rs. 4,25,000 ```
---
**b) Treatment of government grant:**
Two common approaches as per Indian accounting standards (AS):
#### Approach 1: Capital Grant treated as **Deferred Income**
* Recognize government grant as **liability (deferred income)**. * The grant is **amortized over the useful life of the asset** as income, matching depreciation expense.
**Journal entry on receipt of grant:**
``` Dr. Cash/Bank Rs. 60,000 Cr. Deferred Government Grant Income Rs. 60,000 ```
Later, amortize the grant proportionately over asset life.
---
#### Approach 2: Capital Grant deducted from the cost of asset
* Reduce the cost of asset by the grant amount. * So, the asset value shown in books is Rs. 4,25,000 - Rs. 60,000 = Rs. 3,65,000. * Depreciation charged on net asset value.
**Journal entry on purchase:**
``` Dr. Boundary Wall (Fixed Asset) Rs. 3,65,000 Dr. Cash/Bank Rs. 60,000 Cr. Cash/Bank or Creditors Rs. 4,25,000 ```
---
### 3. Applicable Accounting Standards:
* **AS 12 – Accounting for Government Grants** is the most relevant standard. * It deals with recognition, measurement, and disclosure of government grants and related disclosures. * Also, **AS 10 – Property, Plant and Equipment** (formerly Fixed Assets) applies for asset recognition and depreciation.
---
### Summary:
| Step | Treatment | | -------------------- | ------------------------------------------------------------------------------------------------- | | Asset Recognition | Capitalize boundary wall at cost Rs. 4,25,000 | | Government Grant | Either treat as deferred income and amortize over asset life OR reduce asset cost by grant amount | | Accounting Standards | AS 12 (Govt Grants), AS 10 (Fixed Assets) |
---
If you want, I can help prepare sample journal entries for either method or any further clarifications!
CAclubindia
