Accounting treatments for building under construction of npo

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ravi dhadve (Querist)
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02 October 2016 Dear Sirs
I need help for passing entries of building under construction in non profit organisations like public charitable trust. What are the methods of accounting for building under construction in NPO?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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14 July 2024 In a non-profit organization (NPO) such as a public charitable trust, accounting for a building under construction typically follows certain principles to ensure proper reporting and compliance with accounting standards. Here’s how you can pass entries for a building under construction in an NPO:

### 1. Initial Recognition:

When construction of the building begins, costs incurred are capitalized as part of the building under construction.

- **Journal Entry:**
```
Building under Construction Account Dr.
To Cash/Bank Account
```
- Debit the Building under Construction Account to record the cost of construction incurred.
- Credit the Cash or Bank Account to reflect the payment made for construction expenses.

### 2. Accrual of Direct Costs:

During the construction phase, direct costs directly attributable to the construction of the building are capitalized as part of the building under construction.

- **Journal Entry (for direct costs):**
```
Building under Construction Account Dr.
To Supplier/Contractor Accounts
```
- Debit the Building under Construction Account for direct costs incurred.
- Credit the Supplier or Contractor Accounts for payments made to them.

### 3. Accrual of Indirect Costs:

Indirect costs, such as overheads and administrative expenses directly attributable to the construction, should also be allocated to the building under construction.

- **Journal Entry (for indirect costs):**
```
Building under Construction Account Dr.
To Overheads/Administrative Expenses Account
```
- Debit the Building under Construction Account for indirect costs incurred.
- Credit the Overheads or Administrative Expenses Account accordingly.

### 4. Capitalization Period:

Capitalization of costs continues until the construction is substantially complete and the building is ready for its intended use.

### 5. Transfer to Fixed Assets:

Once construction is complete and the building is ready for use, the building under construction account is closed out and transferred to the Fixed Assets or Property, Plant, and Equipment (PP&E) account.

- **Journal Entry (upon completion):**
```
Fixed Assets (Building) Account Dr.
To Building under Construction Account
```
- Debit the Fixed Assets (Building) Account to recognize the completed building as a fixed asset.
- Credit the Building under Construction Account to close it out.

### 6. Depreciation:

After the building is completed and ready for use, depreciation is charged on the building based on its useful life. Depreciation is typically recorded annually or as per the accounting policy of the NPO.

### Accounting Methods for Building Under Construction in NPO:

- **Accrual Basis:** Record costs as they are incurred, both direct and indirect, until the construction is completed.
- **Capitalization:** Capitalize all costs directly attributable to the construction of the building.
- **Depreciation:** Depreciate the completed building over its estimated useful life once it is ready for use.

### Reporting in Financial Statements:

In the financial statements of the NPO:

- **Balance Sheet:** The Building under Construction will be shown as a separate line item under Fixed Assets until construction is completed.
- **Income Statement:** No depreciation expense is recorded until the building is completed. Direct and indirect costs are capitalized as incurred.

### Conclusion:

Proper accounting for building under construction in an NPO ensures transparency and compliance with accounting standards. It’s important to maintain detailed records of all costs incurred during construction and to apply appropriate accounting treatments as per the guidelines of accounting standards applicable to NPOs in your jurisdiction. Consulting with a professional accountant or auditor familiar with NPO accounting practices can provide further guidance tailored to your specific organizational needs.