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:
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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.
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