Valuation of Inventory

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CA Mukesh Mishra (Querist)
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10 August 2010 Sirs,
i am auditing a company and the main business of the company is software development. Company also charges VAT on sales of the software whether there will be inventory or not?

Shudhanshu Agrawal

Shudhanshu Agrawal (Expert)
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10 August 2010 In software companies mainly softwares are prepared after receiving a contract with the contractor and sometimes advance is also received. According to me there can not be software in inventory as software designing and other are considered consultancy services.

CA Mukesh Mishra

CA Mukesh Mishra (Querist)
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10 August 2010 Thanks for reply. But if VAT is charged then what?
The company has valued inventory by measuring personnel cost incurred till 31st march to develop software.
Whether this tratment is correct

Shudhanshu Agrawal

Shudhanshu Agrawal (Expert)
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10 August 2010 Charging VAT is a seprate case as VAT is applicable on sale of a product. You must be knowing that actual software is always one and then it is sold to different customers and updated from time to time.

Most of the companies follow the same method which is followed by your company. In IT companies upto 80% cost is related to employees. It means main cost is man power. It takes years to prepare one software and hence till the actual software is prepared they usually transfer all the expenses in software development a/c and when software is sold then they set off it with the sales receipt.

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