When to recognize expense

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Rahul Sharma (Querist)

01 March 2014 Can anyone pls tell me when to book the expense of Lift installation under construction business.

Total contract price of lift installation is 1300000/- payment is made in 2 years and in 2nd year lift is installed in construction site.
Lift not to be treated as Fixed Asset. It is a material used in the completion of building for sale.
Thanks

@VaibhavJ

@VaibhavJ (Expert)

01 March 2014 Costs are usually classified into two categories: product costs and period costs. Product costs, such as material, labor, and factory overhead, attach to the product. Companies carry these costs into future periods if they recognize the revenue from the product in subsequent periods. Period costs, such as salaries and other administrative expenses are recognized when they are incurred. This approach is commonly referred to as the matching principle. However, there is some debate about the theoretical validity of the matching principle. A key concern is that matching allows companies to defer certain costs and treat them as assets on the balance sheet even though these costs may not have future benefits.

Rahul Sharma

Rahul Sharma (Querist)

03 March 2014 Thanks Vivek but my question is when to record lift expense.
when we make payment to the Lift making co.( in installments) or when we got the delivery of lift in my construction site.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

03 August 2025 Great question!

Since the lift is not treated as a fixed asset but as material used in completing the building for sale, it’s considered part of the cost of inventory (work-in-progress or finished goods).

When to record the expense:

You should capitalize the lift cost as inventory when the lift is delivered and installed on site, i.e., when you actually receive the benefit of the asset/material for the project.

Even if payment is made in installments, expense (or cost) recognition should be on the basis of receipt/installation because until then, you don’t have control over the asset or material for your construction.

The payments made before delivery are advances or prepayments (recorded as assets) and should be recognized as cost only when the lift is installed/received.

So,

At payment (if advance): Dr Advance to Supplier (Asset) / Cr Cash/Bank

On delivery/installation:
Dr Construction Work-in-Progress (Inventory) / Cr Advance to Supplier (if any) or Supplier Payable

This way, the cost matches with the revenue from the building when sold, following the matching principle.

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