Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more
Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.
Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.
Example
If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).
When an asset is undergoing construction, the journal entry for each expense would be recorded as
Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as
After transfer to Fixed Asset account, depreciation can be calculated and shown as below
If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.
The term ‘contra’ means 'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more
The term ‘contra’ means ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.
The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.
These are the contra revenue accounts commonly seen in businesses:
Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:
The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.
Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:
Sales discount is an expense hence it is debited to the profit and loss account.
Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:
Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more
Meaning
Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.
Examples of capital assets are plant, machinery, land, building, vehicles etc.
To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.
When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.
Assets that do not qualify as capital assets
The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.
Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.
For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.
Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more
Yes, Capital Work in Progress is Tangible Asset.
To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.
Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.
For example:
If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.
Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.
It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:
Advance payment to the contractor
Material used/purchased
Cost of labor incurred, etc.
Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.
Capital Work in Progress is shown in the Balance Sheet as:
A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to mainRead more
A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to maintain the historical value of the main account while all the deductions are recorded in the contra account, which when clubbed together show the net book value.
For example
if the cost of machinery was Rs. 50,000 and the company wants to preserve its original cost, then the accumulated depreciation of such machinery is recorded separately. Let’s say Rs 10,000 was the accumulated depreciation. Then such amount is recorded in the contra account named accumulated depreciation account. This makes the net value of the machinery Rs 40,000.
Types
There are various types of contra accounts such as contra asset, contra equity, contra revenue, and contra liability.
Contra asset: these accounts have credit balances and are used to reduce the balance of an asset. Eg, Accumulated depreciation.
Contra Liability: These accounts have debit balances and are used to reduce the balance of liabilities. Eg, discount on notes.
Contra equity: These accounts have a credit balance and are used to reduce the number of shares outstanding which in turn reduces equity. Eg treasury stock.
Contra revenue: These accounts have a debit balance. They reduce gross revenue which results in net revenue. Eg sales return.
Accountants make use of contra accounts instead of reducing the value of the actual account to keep the financial statements clean.
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable. Interest on capital is the aRead more
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.
Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.
If there is a loss, no interest will be paid on capital.
Journal Entry for Interest on Capital in Sole Proprietorship:
Interest on capital entry
Interest on Capital A/c
Debit
Debit the increase in expense.
   To Owner’s Capital A/c
Credit
Credit the increase in income.
2. Closing interest on capital account
Profit and Loss A/c
Debit
Debit the increase in expense.
   To Interest on Capital A/c
Credit
Credit the increase in income.
In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.
For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:
Interest on capital entry
Interest on Capital A/c
5,000
   To Owner’s Capital A/c
5,000
2. Closing interest on capital account
Profit and Loss A/c
5,000
   To Interest on Capital A/c
5,000
In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.
If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.
A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more
A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.
Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:
Capital introduced in the firm
Capital withdrawn
Interest on Capital
Interest on Drawings
Profit or loss in the financial year, etc.
When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.
In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.
Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.
Example:
In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:
Partner A- 10,000 * 10/100 = 1,000
Partner B- 20,000 * 10/100 = 2,000
The journal entry for Interest on Capital is an adjusting entry and is shown as:
Interest on Capital A/c                                                         Dr.
3,000
                                    To A’s Capital a/c
1,000
                                    To B’s Capital A/c
2,000
Partner’s Capital Account is credited because it is credit in nature and interest on capital is an addition to the account.
Interest on Capital Account is debited because it is an expense account.
Can capital work in progress be depreciated?
Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs arRead more
Capital Work in Progress refers to the total cost incurred on a fixed asset that is still undergoing construction as on the balance sheet date. These costs are not allowed to be used as an operating asset until the asset is ready to use. Until the construction of the asset is completed, the costs are recorded as capital work in progress.
Depreciation is the systematic allocation of the cost of an asset over its useful life. Depreciation is charged on an asset from the date it is ready to use. Since Capital Work in Progress is not yet ready to use, depreciation cannot be charged on it.
Example
If a company owns a Machinery worth Rs. 45,000 out of which Rs. 15,000 is part of capital work in progress, then depreciation on such machinery would be calculated only on the part of machinery that is ready to use that is Rs. 30,000 (45,000-15,000).
When an asset is undergoing construction, the journal entry for each expense would be recorded as
Further, when all construction of the above asset is completed, it is transferred to fixed asset account. This would be recorded as
After transfer to Fixed Asset account, depreciation can be calculated and shown as below
If the construction of an asset is complete but has not been put to use till now, depreciation is still calculated as it is ready for use. It can be done through various methods like straight-line method, written down value method etc.
See lessWhat is a contra revenue account?
The term ‘contra’ means 'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more
The term ‘contra’ means ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.
The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.
These are the contra revenue accounts commonly seen in businesses:
The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.
Sales discount is an expense hence it is debited to the profit and loss account.
Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:
See lessWhat is a capital asset?
Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more
Meaning
Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.
Examples of capital assets are plant, machinery, land, building, vehicles etc.
To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.
When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.
Assets that do not qualify as capital assets
The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.
Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.
For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.
See lessIs capital work in progress a tangible asset?
Yes, Capital Work in Progress is Tangible Asset. To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets. Capital work in progress is the cost incurred on fixed aRead more
Yes, Capital Work in Progress is Tangible Asset.
To attain an understanding of the same, we first need to understand what are tangible assets. Assets that have a physical existence, that is they can be seen, touched are called Tangible Assets.
Capital work in progress is the cost incurred on fixed assets that are under construction as on the balance sheet date. Since the asset cannot be used for operation it cannot be classified as a Fixed Asset.
For example:
If an asset takes 1.5 years to be constructed as on 1.4.2020 then on the balance sheet date 31.3.2021, the cost incurred on the asset will be classified as Capital Work in Progress.
Common examples of Capital Work in Progress include immovable assets like Plant and Machinery, Buildings.
It is shown under the head Non-Current Assets in the balance sheet. Examples of cost included in Capital Work in Progress can be:
Since the assets under the head Capital Work in Progress are in the process of completion and not completed, hence they are not depreciable until completed. Once the asset is completed it is moved under the head Fixed Assets.
Capital Work in Progress is shown in the Balance Sheet as:
See lessWhat is a contra account?
A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to mainRead more
A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to maintain the historical value of the main account while all the deductions are recorded in the contra account, which when clubbed together show the net book value.
For example
if the cost of machinery was Rs. 50,000 and the company wants to preserve its original cost, then the accumulated depreciation of such machinery is recorded separately. Let’s say Rs 10,000 was the accumulated depreciation. Then such amount is recorded in the contra account named accumulated depreciation account. This makes the net value of the machinery Rs 40,000.
Types
There are various types of contra accounts such as contra asset, contra equity, contra revenue, and contra liability.
Accountants make use of contra accounts instead of reducing the value of the actual account to keep the financial statements clean.
See lessIs there interest on capital in sole proprietorship?
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable. Interest on capital is the aRead more
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.
Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.
If there is a loss, no interest will be paid on capital.
Journal Entry for Interest on Capital in Sole Proprietorship:
2. Closing interest on capital account
In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.
For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:
2. Closing interest on capital account
In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.
If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.
See lessWhat is interest on partner’s capital?
A Capital Account is an account that shows the owner's equity in the firm and a Partner's Capital Account is an account that shows the partner's equity in a partnership firm. Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are: CapitalRead more
A Capital Account is an account that shows the owner’s equity in the firm and a Partner’s Capital Account is an account that shows the partner’s equity in a partnership firm.
Partner’s Capital Account includes transactions between the partners and the firm. Examples of such transactions are:
When partners are given interest on their capital contribution in the firm, it is called on Interest on Capital.
In case the partnership firm does not have a Partnership Deed, the Partnership Act does not include a provision for Interest on Capital. However, if the partners want they can mutually decide the rate of Interest on Capital.
Interest on Capital is calculated on the opening capital of the partners and is only allowed when the firm makes a profit, that is, in case a firm incurs losses, it cannot allow Interest on Capital to its partners.
Example:
In a partnership firm, there are two partners A and B, and their capital contribution is Rs 10,000 and 20,000 respectively. Interest on capital is @ 10% p.a. The Interest on Capital for both the partners is:
Partner A- 10,000 * 10/100 = 1,000
Partner B- 20,000 * 10/100 = 2,000
The journal entry for Interest on Capital is an adjusting entry and is shown as:
See less