Accounting treatment of capital work in progress.

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shweta Agrawal (Querist)
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24 September 2018 What will be the effect of expenditure on liabilities side of a balance sheet in balance sheet of a professionals incurred on construction of a building which is not fully constructed & shown as capital work in progress ? What will be its effect on capital account of a professional or a sole proprietor? On assets side all such expenditure will be capitalised & be shown under the head Fixed Assets under sub head Capital work in progress but how it will be treated on liability side of a balance sheet? Pls help.
However for a NPO such expenditure is shown in the balance sheet sa capital work in progress on assets side as well as such expenditure is added back to capital fund but for a profit making business how such expenditure shall be treated on both side of balance sheet.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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12 July 2024 In a balance sheet of a profit-making business, when expenditures are incurred on the construction of a building that is not yet fully completed and is shown as "Capital Work in Progress" (CWIP), here’s how they are treated on both the assets side and liabilities side:

### Treatment on Assets Side:

1. **Capital Work in Progress (CWIP)**:
- Expenditures incurred on the construction of the building are capitalized under the category of CWIP on the assets side of the balance sheet.
- These expenditures represent the costs accumulated for the construction project that are not yet completed.

2. **Disclosure**:
- CWIP is typically shown under the head "Fixed Assets" as a separate sub-category until the construction is completed and the building is ready for its intended use.

### Treatment on Liabilities Side:

1. **Treatment of Liabilities**:
- The expenditures incurred on construction do not directly affect the liabilities side of the balance sheet in the sense of creating a new liability.
- However, if these expenditures are financed through borrowings or loans, then the corresponding liabilities (such as bank loans or other forms of financing) would be recorded separately under the liabilities section.

### Effect on Capital Account of a Professional or Sole Proprietor:

1. **Capital Account**:
- For a professional or a sole proprietor, the capital account represents the owner's equity in the business.
- Expenditures on construction, if funded by the owner's investment or retained earnings, do not impact the liabilities side directly but are reflected indirectly through the increase in the value of the asset (CWIP) on the assets side.

2. **Impact on Profitability**:
- Capitalizing these expenditures as CWIP does not immediately affect the profit and loss statement (income statement). Instead, depreciation or amortization expenses related to the completed building will be recorded once the asset is put to use.

### Comparison with Non-Profit Organizations (NPOs):

1. **NPOs**:
- In NPOs, expenditures on construction are treated similarly in terms of capitalizing them under CWIP on the assets side.
- On the liabilities side, such expenditures may be added back to the capital fund or shown as restricted funds, depending on the specific accounting policies.

### Conclusion:

In summary, for a profit-making business, expenditures on the construction of a building that is not fully constructed are treated by capitalizing them under CWIP on the assets side of the balance sheet. They do not create a direct liability unless financed through external borrowings. These expenditures do not impact the capital account directly but contribute to the overall value of fixed assets held by the business. It's crucial to follow accounting standards and consult with a professional accountant or financial advisor to ensure proper treatment and compliance with relevant regulations.