Inventory
This query is : Resolved
22 February 2016
I have a doubt on inventory. Here the company (a palm oil plantation) is capitalizing stationaries(catridge, toner, papers etc), fuel for vehicles used for administrative purposes, electrical & other construction materials for building staff quarters, rice for staff etc. These items are in bulk quantity and they expense it when they use it. Is it the correct treatment or they should expense it on purchase?
23 February 2016
The rule & concept is one but there are different ways to doing accounting and inventory control and its basically depends on the nature & transactions of the business.
But I didnt understand why they are capitalizing all these, is the plant is in project stage??
Still the best option is to book these purchases under Store & Consumable purchases (under Purchase A/c) and then on the basis of consumptions details given by the store dept. these can be either capitalized or expensed out.
Further for better clarity different sub-ledgers can be opened under Store & Consumable Group : - Like, Mechanical purchases, Building material purchase, printing & stationery purchases, Electrical goods purchases, etc....
But I didnt understand why they are capitalizing all these, is the plant is in project stage??
Still the best option is to book these purchases under Store & Consumable purchases (under Purchase A/c) and then on the basis of consumptions details given by the store dept. these can be either capitalized or expensed out.
Further for better clarity different sub-ledgers can be opened under Store & Consumable Group : - Like, Mechanical purchases, Building material purchase, printing & stationery purchases, Electrical goods purchases, etc....
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23 February 2016
It can be said to be correct method. Offer it to revenue when spent or consumed' is the principle followed. It is correct
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23 February 2016
Capitalizing in the sense treating it as a balance sheet item (as inventory) instead of expenses. These company use IFRS. So as per IAS 2,
The following terms are used in this Standard with the meanings
specified:
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
So can we consider this items as inventory. What AS 2 says?
The following terms are used in this Standard with the meanings
specified:
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
So can we consider this items as inventory. What AS 2 says?
01 August 2024
Under IFRS and AS 2, the treatment of various items as inventory or expenses depends on their nature and use within the business. Here’s a detailed analysis based on IAS 2 (International Accounting Standard) and AS 2 (Accounting Standard) principles:
### **IAS 2 (IFRS) Analysis:**
**Definition of Inventories (IAS 2):**
- **IAS 2** defines inventories as assets:
- (a) Held for sale in the ordinary course of business.
- (b) In the process of production for such sale.
- (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.
**Capitalizing vs. Expensing:**
- **Stationaries (cartridges, toner, papers, etc.)**: These items are generally considered supplies or administrative expenses. They are usually expensed as they are consumed because they do not contribute directly to the production of goods or services.
- **Fuel for Vehicles Used for Administrative Purposes**: Since the fuel is used for administrative purposes rather than production, it should typically be expensed as incurred.
- **Electrical & Other Construction Materials for Building Staff Quarters**: These materials are usually capitalized as part of property, plant, and equipment or a building asset if they are used for constructing assets like staff quarters.
- **Rice for Staff**: This is generally considered a welfare expense or an operational expense rather than inventory. It is usually expensed when incurred.
### **AS 2 (Indian Accounting Standards) Analysis:**
**Definition of Inventories (AS 2):**
- **AS 2** defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
**Treatment:**
- **Stationaries and Fuel**: As with IAS 2, these items are generally considered administrative expenses and should be expensed rather than capitalized, as they do not contribute directly to the production or provision of services.
- **Construction Materials for Staff Quarters**: AS 2 allows capitalization of such materials if they are used in the construction of assets. They should be included in the cost of the building or asset being constructed.
- **Rice for Staff**: This should be treated as a welfare expense and expensed as incurred rather than capitalized as inventory.
### **Summary:**
Based on IAS 2 and AS 2:
- **Capitalization** is appropriate for items directly related to the production or construction of assets (e.g., construction materials for staff quarters).
- **Expenses** should include items used in the administration of the company or for welfare purposes, such as stationaries, fuel for administrative vehicles, and rice for staff.
In your case, you should capitalize the construction materials for building staff quarters but expense the other items such as stationaries, administrative fuel, and rice as they do not meet the criteria for capitalization under IAS 2 or AS 2.
### **IAS 2 (IFRS) Analysis:**
**Definition of Inventories (IAS 2):**
- **IAS 2** defines inventories as assets:
- (a) Held for sale in the ordinary course of business.
- (b) In the process of production for such sale.
- (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.
**Capitalizing vs. Expensing:**
- **Stationaries (cartridges, toner, papers, etc.)**: These items are generally considered supplies or administrative expenses. They are usually expensed as they are consumed because they do not contribute directly to the production of goods or services.
- **Fuel for Vehicles Used for Administrative Purposes**: Since the fuel is used for administrative purposes rather than production, it should typically be expensed as incurred.
- **Electrical & Other Construction Materials for Building Staff Quarters**: These materials are usually capitalized as part of property, plant, and equipment or a building asset if they are used for constructing assets like staff quarters.
- **Rice for Staff**: This is generally considered a welfare expense or an operational expense rather than inventory. It is usually expensed when incurred.
### **AS 2 (Indian Accounting Standards) Analysis:**
**Definition of Inventories (AS 2):**
- **AS 2** defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
**Treatment:**
- **Stationaries and Fuel**: As with IAS 2, these items are generally considered administrative expenses and should be expensed rather than capitalized, as they do not contribute directly to the production or provision of services.
- **Construction Materials for Staff Quarters**: AS 2 allows capitalization of such materials if they are used in the construction of assets. They should be included in the cost of the building or asset being constructed.
- **Rice for Staff**: This should be treated as a welfare expense and expensed as incurred rather than capitalized as inventory.
### **Summary:**
Based on IAS 2 and AS 2:
- **Capitalization** is appropriate for items directly related to the production or construction of assets (e.g., construction materials for staff quarters).
- **Expenses** should include items used in the administration of the company or for welfare purposes, such as stationaries, fuel for administrative vehicles, and rice for staff.
In your case, you should capitalize the construction materials for building staff quarters but expense the other items such as stationaries, administrative fuel, and rice as they do not meet the criteria for capitalization under IAS 2 or AS 2.
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