in hotel industries if concern asseessee having hotel property on rent agreement and concern assessee made expenses on furniture fitting. addition in such property ..!!! so my query is accounting treatment of such exp ...!! whether i have to book as revenue .. or capitalized such exp..!!! if i have to capitalized then how ..? because i have such hotel building property on rent ..!! i hope i will get correct answer from experts and my senior ..!! thank's
I think you cannot charge to revenue as all the expenses are in capital nature. Movable fixed assets lik furniture has to recognize independently and depreciate over the life of the asset specified in companies act 2013. Immovable assets lik fittings etc has capitalise under the category leasehold improvements and depreciate over the tenure of lease agreement.
18 February 2016
thank you sir but hotel property is on lease and lock in period is 5 year , spend heavy exp for set up restarent fitting and furniture (non movable ) and other shed construction work is done after taking on lease. paid by tenant .
28 July 2024
When dealing with expenses related to furniture, fittings, and other improvements in a leased property, the accounting treatment can be nuanced. Here's a detailed breakdown:
### **1. Understanding the Nature of Expenses**
#### **Capital vs. Revenue Expenditure**
**Capital Expenditure**: - **Definition**: Expenditure that results in an enhancement of the value of the property or extends its useful life. - **Examples**: Furniture, fittings, and structural improvements that are intended to add value to the property or make it more functional.
**Revenue Expenditure**: - **Definition**: Expenditure that is incurred for the day-to-day operation of the business and does not add lasting value to the asset. - **Examples**: Repairs and maintenance that do not enhance the value of the property.
### **2. Accounting Treatment for Leasehold Improvements**
Since the hotel property is on lease and you have incurred significant expenditure on furniture, fittings, and other improvements, the treatment is as follows:
**1. **Capitalization of Leasehold Improvements**:
- **Nature of Expenditure**: The expenses on furniture and fittings (non-movable assets) and other improvements made to the leased property typically qualify as **capital expenditure**. This is because they are meant to enhance the operational capacity of the hotel and provide long-term benefits.
- **Accounting Treatment**: Capitalize these expenditures as **Leasehold Improvements** or **Fixed Assets** in your books. They should be recorded under fixed assets, even though the property itself is leased.
- **Journal Entries**: ``` Dr. Leasehold Improvements (or relevant asset account) XXXX Cr. Bank/Cash/Payables XXXX ``` This entry reflects the acquisition of the asset.
**2. **Depreciation**:
- **Depreciation on Leasehold Improvements**: Since these improvements are considered capital assets, they need to be depreciated over their useful life. This applies even though the property is leased.
- **Depreciation Rate**: The depreciation rate would typically follow the rate prescribed for similar assets under the Income Tax Act or accounting standards. For furniture and fittings, it might be around 10% to 20% per annum on a straight-line or written-down value basis.
- **Journal Entries for Depreciation**: ``` Dr. Depreciation Expense XXXX Cr. Accumulated Depreciation XXXX ```
**3. **Amortization of Leasehold Improvements**:
- **Amortization Period**: Since the lease is for 5 years, it’s prudent to amortize the capital expenditure over the lease period or the useful life of the improvements, whichever is shorter.
- **Journal Entries for Amortization**: ``` Dr. Amortization Expense (Leasehold Improvements) XXXX Cr. Accumulated Amortization XXXX ```
**4. **Accounting for Lease Payments**:
- Lease payments made to the lessor should be recorded as **Lease Rent Expense**.
- **Lease Expiry**: At the end of the lease term, any unamortized balance of leasehold improvements should be written off unless the lease is renewed or the improvements are transferable to another location.
### **4. Practical Example**
Assuming you spent Rs. 5,00,000 on furniture and fittings and have a lease term of 5 years:
- **Annual Depreciation (assuming straight-line basis and a 5-year useful life)**: ``` Annual Depreciation = Rs. 5,00,000 / 5 = Rs. 1,00,000 per year Dr. Depreciation Expense Rs. 1,00,000 Cr. Accumulated Depreciation Rs. 1,00,000 ```
### **Conclusion**
Expenses related to furniture, fittings, and improvements in a leased hotel property should generally be capitalized as leasehold improvements and depreciated over the lease term or their useful life. Ensure you follow the applicable accounting standards and tax regulations for accurate reporting.
For detailed guidance tailored to your specific situation and compliance with current regulations, consulting with an accounting professional is advisable.
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