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Radha
Radha
In: 1. Financial Accounting > Miscellaneous

Can capital work in progress be depreciated?

Can capital work in progress be depreciated?
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    1 Answer

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    1. Rahul_Jose Aspiring CA currently doing Bcom
      2021-12-07T20:07:16+00:00Added an answer on December 7, 2021 at 8:07 pm
      This answer was edited.

      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.

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