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capitalisation

amar preet singh (professional) (229 Points)

04 May 2009

I AM CONSTRUCTING BUILDING FOR WHICH I PURCHASE CEMENT BAGS FOR RS. 50000/- , IRON FOR RS. 10000/- . SHOULD IT BE MERGE WITH BUILDING A/C. IN MY POINT OF VIEW THE ENTRY MUST BE WRITTEN LIKE THIS :

DR. BUILDING 60000/-

CR CASH/ BANK 60000/-

AM I RIGHT? OR I HAVE TO ENTER LIKE THIS :

DR. CEMNET BAGS 50000/-

DR. IRON 10000/-

FURTHUR IF I PAIID TO LABOUR FOR CONSTRUCT THE BUILDING RS. 20000/-

SHOULD I MADE ENTRY LIKE THIS :

DR. LABOUR 20000/-

CR. CASH/ BANK 20000/-

OR SHOULD I MADE LIKE THIS

DR. BUILDING 20000/-

CR. CASH/BANK 20000/-

LASTLY IN BRIEF I WANT TO SAY THAT EXPENSES ON CEMENT , IRON AND LABOUR WILL BE DEBITED TO BUILDING ACCOUNT OR I SHOULD MADE SEPERATE ENTRY FOR EATCH EXPENSES

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8 Replies

CA SUDIPTA SINHA (Commerce Coaching- Accounts Cost FM) (735 Points)
Replied 05 May 2009

when u are constructing a building all the expenses directly attributable to such construction shall be capitalised. hence all the expenses like cemnet,iron.labour charge shall be debited to building account.

CA P KARTHIKA (Chartered Accountant) (715 Points)
Replied 06 May 2009

Ya sudipto Sinha is rite!!! Expenses directly attributable for the construction of your fixed asset - building need to be capitallised.
And the expenses incurred in the nature that it is the major contribution for creation of asset also should be capitalised...

So justify your expenses in capital and revenue nature and account!!!

ankit singhal (student) (123 Points)
Replied 06 May 2009

when u r constructing any building so u have to debit all expenses directly to building or u can debit

project cost_cement

Project cost_Iron

Project Cost_Labour

But all these should be capitalise in building cost

M.M.SURANA (Director -Taxation ) (532 Points)
Replied 11 May 2009

Mr. Amarpreet Singh

All the expenses relates to Building Construction should be capitalise and debit to Building A/c . U need not to go for separate heads e.g. cements, labour, iron etc.

navan (student) (111 Points)
Replied 29 May 2009

After the time of purchase u can't use all the items at a time. So i my view the following entries may be passed:-

For capitalization u may go thru,AS-10 and AS-16.

1.At the time of purchase,

Stock a/c Dr.

To cash a/c

What ever u purchase it should be in stock.

2. At the time of using materials

Capital WIP-Buildings a/c Dr

To Stock A/c

Here in the above entry both items of capital and revenue nature will come. After the end of the project it transferred to their accounts

3. At the time of completion of the project,

Buildings a/c Dr

To Capital WIP-Buildings a/c

Note:- The items said in ur example if they provide additional capacity or production to the plant, then the said items are to be capitalized,other wise they are transferred to "repairs to Buildings" in the p &L a/c.

Amol Gopal Kabra (CA,CS,DISA) (Practicing CA) (8539 Points)
Replied 01 June 2009

I agree with whar navan has said. Still i have a different and alternative point of view.

Whenever the material is purchased or labour charges are paid, the entry can be done in the following manner

Capital WIP A/c Dr. 60,000

To Cash / Bank A/c 60,000

Further, you can create cost centres whereby you can enter the details of the items purchased. Here you can show the purchased categorised in cement, steel, labour charges, etc..

Suprio (Sr. Manager Accounts & Systems) (43 Points)
Replied 03 June 2009

When any Building is under Construction then materials purchased & labour chgs paid for it should be debited to Either Assets In course of Construction A/c or Capital work in progress A/c . After completion of the construction a certificate to be obtained from the architect along with the details of materials used in the construcion. Only the cost of material as certified by the architect to be capitalised in Building and the rest stock of material should remain in Capital work in progress.

ADITYA (Manager Finance) (742 Points)
Replied 04 June 2009

Natuarally, all the expenses incurred for constructing Building will be debited to "Building Account" and the Total Cost will be CAPITALISE.

While debiting you can put naration as suggested by Ankit.

For the sake of labour Law compliances, you can keep two Account viz Building Account - Material & Building Account - Labour. After Completion of the Building you can merge both the accounts through J / v