Cash withdrawl for house construction

This query is : Resolved

Saurabh Garg (Querist)
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21 August 2015 A prop. has withdrawal cash from his saving account for purchase of Materials for construction of his house.

How he will account for such withdrawal in his audited account as cash balance is coming more...

Can he debit the same withdrawal in Construction account and the same can be transferred to Plot(Fixed Assets)...

Kindly help...???

Saurabh Garg

Saurabh Garg (Querist)
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28 August 2015 Sir can anybody help ragrding this...???

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 When a proprietor withdraws cash from his savings account for the purpose of purchasing materials for the construction of his house, the accounting treatment should be done carefully to reflect the correct financial position and ensure compliance with auditing standards. Here’s how it can be accounted for:

1. **Recording the Cash Withdrawal:**
- The withdrawal of cash should be recorded in the proprietor's books of accounts under the relevant account, such as "Cash Withdrawals" or "Drawing Account". This is typically a temporary account that tracks the withdrawals made by the proprietor for personal or business use.

2. **Allocation to Construction Account:**
- The amount withdrawn should then be allocated to the "Construction Account" or "House Construction Account". This account is used to accumulate all expenses related to the construction of the house, including materials, labor, and other direct costs.

3. **Transfer to Fixed Assets (Plot):**
- Once the materials are purchased with the cash withdrawn, the cost of these materials should be transferred from the Construction Account to the appropriate Fixed Asset account. Since you mentioned the purchase is for materials related to the construction of his house, these expenses are capitalized as part of the cost of the house under construction.
- If the cash withdrawal was used directly for purchasing the plot of land (fixed asset), then it should be capitalized directly into the Plot or Land account.

4. **Accounting Entries:**
- **For Cash Withdrawal:**
```
Debit: Construction Account (for house construction expenses)
Credit: Cash Withdrawals (or Drawing Account, representing personal withdrawals)
```
- **For Purchase of Materials:**
```
Debit: Construction Account (reducing the balance for materials purchased)
Credit: Cash or Bank Account (to reflect the cash outflow)
```
- **For Transfer to Fixed Assets (Plot):**
```
Debit: Plot Account (or Land Account, representing the cost of the plot)
Credit: Construction Account (transferring the cost of materials to the fixed asset)
```

5. **Auditing and Compliance:**
- Ensure that all transactions are properly documented, including invoices or receipts for materials purchased, to support the cash withdrawals and expenses.
- During auditing, the auditor will review these transactions to ensure accuracy, completeness, and compliance with accounting standards.

6. **Tax Implications:**
- Consider consulting a tax advisor to understand any tax implications of these transactions, especially relating to house construction and capitalization of expenses.

By following these steps, the proprietor can accurately account for the cash withdrawals made for house construction while maintaining proper records for auditing and financial reporting purposes.

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