How to loss of construction firm

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

25 June 2014 Dear Sir
I am partner in developer firm. We have constructing one building. During the financial year 2013-14 construction of building was not complete.Now we want to pay interest on partners capital & paid regular expenses like salaries to staff for FY 2013-14. Now my question is that whatever expenses incurred during FY 2013-14 like interest, salary should be debited to the profit and loss account or it should be added to the cost of the building like cement steel and show as stock in hand ???

Rupesh Jain

Rupesh Jain (Expert)
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25 June 2014 you can calculate the income according to % of completion of building and exp. for construction of building will cost of your building and exp. other than construction of building will indirect exp. for you firm/business.
your building not complete on 31.3.20... then you show as stock as raw material, work in progress , finished goods. after that you can give intt on capital to partner and profit share to partners.

Querist : Anonymous

Querist : Anonymous (Querist)

25 June 2014 Dear Sir

Can I show what ever expenses incurred on building till date 31.03.2014 as work in progress, not show income on % of completion basis ?? and claim indirect expenses as loss ? If I show income on % completion basis than issue of Service tax and VAT araises

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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28 July 2024 When dealing with construction or building projects, particularly in accounting and taxation, the treatment of expenses and income can be complex. Here’s how to handle the situation according to accounting standards and tax regulations:

### **1. Work-in-Progress (WIP) Accounting**

**Work-in-Progress (WIP):** You can show expenses incurred on the building as Work-in-Progress if the project is not yet completed. WIP represents costs that have been incurred but not yet billed to the customer.

**Accounting for WIP:**
- **Recording Costs:** Record all direct costs (material, labor) and indirect costs (overheads, utilities) associated with the building project as WIP on your balance sheet.
- **Periodic Assessment:** At the end of each accounting period, assess the value of WIP to ensure it accurately reflects the costs incurred.

### **2. Percentage of Completion Method**

**Income Recognition:** According to accounting standards, especially under **Ind AS 11** (or **AS 7** in India), income from construction contracts should generally be recognized based on the percentage of completion method.

**Percentage of Completion Method:**
- **Calculate Completion Percentage:** Determine the percentage of completion based on costs incurred to date compared to the total estimated costs.
- **Recognize Income:** Recognize income proportionately. For example, if 50% of the work is completed, you would recognize 50% of the contract revenue.

**Tax Implications:**
- **Service Tax:** Under the service tax regime, service tax may be applicable based on the amount recognized as income. You need to account for service tax on the portion of income recognized.
- **VAT:** Similarly, VAT or sales tax may be applicable based on the portion of revenue recognized.

### **3. Claiming Indirect Expenses as Loss**

**Indirect Expenses:**
- **Direct vs. Indirect Costs:** Indirect expenses, like administrative overheads, are usually absorbed into WIP or project costs until the project is completed.
- **Claiming Loss:** If you choose to recognize all costs as a loss and not recognize any income, you might claim indirect expenses as a loss. However, this approach might not be compliant with accounting standards or tax regulations.

### **4. Tax Considerations**

**Service Tax and VAT:**
- **If Using Percentage of Completion:** Recognize income and apply service tax and VAT as per the proportion of work completed. This will ensure compliance with tax regulations.
- **If Not Recognizing Income:** This could lead to complications. The tax authorities may question why no income is being recognized. Moreover, service tax and VAT regulations may require income recognition and tax payment even if the project is not complete.

### **5. Recommendations**

**Consult with a Professional:**
- **Tax Consultant/Accountant:** Since tax regulations and accounting standards can be intricate, it is crucial to consult with a tax advisor or accountant who can provide guidance tailored to your specific situation.
- **Review Regulations:** Ensure compliance with the latest accounting standards and tax regulations. Tax authorities might have specific requirements for recognizing income and reporting expenses.

**Documentation:**
- **Maintain Records:** Keep detailed records of all expenses and work completed. This will support your accounting and tax filings.

**Compliance:**
- **Follow Standards:** Adhering to accounting standards and tax laws is crucial to avoid legal complications and ensure accurate financial reporting.

**Summary:**
While you can show expenses as Work-in-Progress, not recognizing income on a percentage of completion basis might not align with accounting standards and tax regulations. It's essential to balance compliance with accurate financial reporting and tax obligations. Consulting with a professional will help navigate these complexities and ensure proper handling of your building project accounts.