In one of the Companies,it was noticed that provision has been created for the non-arrival of the invoice copy of the vendor, though the asset has been physically arrived in the premises. In case this provision has been provided soon after the ending of the half year, whether this provision is subject to depreciation???
Whether this treatment is correct or the arrived asset has to be accounted as CWIP and reversed when the invoice comesin??
Please reply as soon as possible. Thank you in advance
The asset has been put into use, but the invoice has not reached the company. There is no documentary evidence that the asset is belonging to the company, then how come the depreciation can be charged.
Please reply if possible with any reference documents.
21 July 2024
In the scenario where an asset has been physically received and put into use, but the invoice from the vendor has not yet been received, there are specific guidelines and practices that should be followed regarding the treatment of such situations:
1. **Recognition of the Asset**: - When an asset is physically received and put into use, it should generally be recognized in the books of accounts as a fixed asset or capital work-in-progress (CWIP), depending on whether all necessary documentation (including the invoice) has been received.
2. **Provision for Non-Arrival of Invoice**: - It's common practice for companies to create a provision for liabilities or costs that are probable but not yet certain. If there is a reasonable expectation that an invoice will eventually be received, but it has not arrived by the end of the reporting period, a provision for this expense can be made. - This provision is typically made in the financial statements to reflect the estimate of the liability. However, this provision does not affect the recognition of the asset itself.
3. **Depreciation Treatment**: - Depreciation should generally be charged on assets once they are put to use and are available for use in the business operations, regardless of whether the invoice has been received. - The depreciation calculation is based on the cost of the asset and its estimated useful life, as per the applicable accounting standards (such as the Companies Act or accounting standards like Ind AS or IFRS).
4. **Accounting Treatment**: - The asset should be recognized in the books based on the physical receipt and its use. This could mean recording it as a fixed asset if all conditions for capitalization are met, or as CWIP pending receipt of the invoice. - The provision for non-arrival of the invoice should be separately recorded as a liability provision, typically under provisions or accrued expenses, depending on the accounting policies of the company.
5. **Documentation and Reconciliation**: - It's essential to maintain proper documentation and reconcile physical receipts with invoices received. Once the invoice is received, the accounting entries should adjust the provision made earlier and recognize any difference in the cost of the asset or liability.
**Reference and Guidance**: - The Companies Act, accounting standards (like Ind AS or IFRS), and specific company policies govern the treatment of such transactions. - For specific cases and detailed guidance, consulting with a qualified accountant or seeking advice from a professional auditing firm is recommended to ensure compliance with regulations and accurate financial reporting.
In summary, while a provision for non-arrival of an invoice can be made as a liability, the recognition of the asset and the charging of depreciation should proceed based on the physical receipt and use of the asset. Proper documentation and reconciliation are crucial to maintain accurate financial records and ensure compliance with accounting standards.
CAclubindia
