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Freight paid for sending goods for testing

Gaurav Agarwal (Trainee) (44 Points)

07 September 2022

A pipe manufacturing company sends pipes for testing at laboratory which will never be returned back to the company. The freight cost is borne by the company. This freight should be accounted in which head? Is it carriage outward or some other ledger? Note - pipes are sent for testing quarterly.

Also, is RCM applicable here if sent through logistics services like TCI, VRL, etc.? If RCM is applicable then is it valid for both companies and non-companies?

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11 Replies

prasad Nilugal ( GST Practitioner & Accounts ) (14171 Points)
Replied 07 September 2022

You have to show as Fright Charges under Direct Expenses Trading Account, If you are hiring GTA. then RCM applicable.
Carriage Outward is shown under indirect expenses in Profit and loss , for transportation of sold goods , and You have sent goods for testing .

1 Like

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 07 September 2022

Great!! RCM applicability is on google on tax and auditing firm website. In other words, research costs are expensed and only development costs which meet the intangible standard criteria are capitalized.

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 07 September 2022

Im bored and no questions today. Look at how weird this is

59. Subsequent expenditure on an intangible asset after its purchase or its completion
should be recognized as an expense when it is incurred unless:
(a) it is probable that the expenditure will enable the asset to generate future
economic benefits in excess of its originally assessed standard of
performance; and
(b) the expenditure can be measured and attributed to the asset reliably.
If these conditions are met, the subsequent expenditure should be added to the cost of
the intangible asset.

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 07 September 2022

i found out something new while reading as26, para44, these expenses can be capitalised if they are used for stress testing. But however, I guess this is not a development phase product. but if not, then why are you testing it? no mention of treatment for quality checks subsequently.

Gaurav Agarwal (Trainee) (44 Points)
Replied 07 September 2022

Originally posted by : Yasaswi Gomes
	i found out something new while reading as26, para44, these expenses can be capitalised if they are used for stress testing. But however, I guess this is not a development phase product. but if not, then why are you testing it? no mention of treatment for quality checks subsequently.

The manufacturing company has to send samples for testing as and when demanded by Bureau of Indian Standards or when the need arises like when the client insists on getting it tested from a BIS/NABL approved lab or when the company has changed its formulation in the pipe, etc. Also, there are some tests which cannot be performed in-house and so they have to send them to testing centres. Also, the product is a pipe being tested and not an intangible.

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 08 September 2022

Great! Intangible arises even for pipes during the development phase. However, it is clearly mentioned that stress tests are capitalised when they give economic benefit. But not clear enough to mention the status of quality checks.

Attached File : 3176554 20220908093008 as26 16012018.pdf downloaded: 28 times

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 08 September 2022

To understand it is difficult, it's inventory that your stress testing. Prototypes are also capitalised. How the economic benefit must inflow? Through the sale of that pipe or other pipes is my dilemma as well

Gaurav Agarwal (Trainee) (44 Points)
Replied 10 September 2022

See, theres no such connection between getting the pipes tested and economic benefit. Pipes can be tested even for the approved formulation, like I said, as required by BIS they can ask the manufacturer to send samples for testing or when a client wants a recent test result.

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 10 September 2022

Capitalized costs are the expenses that you incur for inventory items before they have been sold. For example, if you buy a new computer for your business and expect that this will increase the productivity of your employees then you would capitalize these costs into an asset on your balance sheet rather than expense them immediately.

Other overheads that are attributable in specific circumstances CAN BE CAPITALISED LIKE STRESS TESTS.

Furthermore, it dictates companies cannot capitalize the following costs.

Abnormal wastage.
Storage costs.
Administrative overheads that do not contribute to bringing the inventory items to their present location and condition.
Selling costs.