One of my client has started a firm having 3 partners. They are into KG/DAYCARE. They took a building and renovated the same to make it a proper nursery by spending around 35 lakhs (including deposits , inaugural expense and renovation of buildings like interior works/paintings). Then one partner chose to withdraw and now they are preparing a new deed. The activity of school has started February only. How the expenses incurred till February can be treated.All expenses were paid by partners personal bank account and they are taking bank account/ GST registration by March only after preparing new deed.
10 July 2024
Handling expenses incurred before the official start of operations can be managed in the following way, considering your client's situation:
### 1. **Identify and Categorize the Expenses:** - Gather all invoices and receipts related to the expenses incurred for the building renovation, deposits, inaugural expenses, and any other relevant costs. Ensure these documents are categorized accurately.
### 2. **Treatment of Expenses:** - **Capitalization:** Since the expenses (totaling 35 lakhs) were incurred to set up the nursery (KG/Daycare), these are considered as capital expenditures. They contribute to establishing the nursery's infrastructure and are not typically expensed immediately.
- **Recording in Accounts:** Create an intangible asset account or a fixed asset account (depending on the nature of the expenses) to record these expenditures. For instance: ``` Dr. Nursery Infrastructure (or equivalent fixed asset account) 35,00,000 Cr. Partners' Personal Bank Accounts (or Capital Accounts) 35,00,000 ``` This entry reflects the capitalization of the expenses into the nursery's asset base.
### 3. **Amortization:** - **Amortization Schedule:** Determine the useful life of the capitalized assets (e.g., building renovation, interior works). Common practice is to amortize these costs over the expected useful life of the assets or a predetermined period. - **Amortization Entry Example:** Assuming a 5-year amortization period: ``` Dr. Amortization Expense - Nursery Infrastructure xxx Cr. Accumulated Amortization - Nursery Infrastructure xxx ``` The amortization expense should be recorded annually in the income statement.
### 4. **GST Registration and Bank Account:** - **Timing:** Since the nursery operations officially started in February, ensure that the GST registration and opening of the business bank account are done promptly after preparing the new deed. - **Expenses After February:** Any expenses incurred from February onwards should be directly expensed in the month they are paid for or accrued, depending on your accounting method.
### 5. **Adjustment in Partnership Deed:** - **Revising Partnership:** With one partner choosing to withdraw, revise the partnership deed accordingly. Ensure the new deed reflects the current partnership structure and responsibilities regarding the nursery's operation and finances.
### **Accounting for Initial Operations:** - **Initial Transactions:** Once the nursery officially starts operations (from February), record all income and expenses related to daily operations in the appropriate accounts (e.g., revenue, salaries, utilities, etc.). - **Separate Accounts:** Ensure clear separation between personal finances of the partners and business finances of the nursery.
### **Consultation:** - **Professional Advice:** Consider consulting with a qualified accountant or tax advisor to ensure compliance with local regulations regarding capitalization, amortization, and GST registration. They can also provide guidance on preparing financial statements and tax filings.
By following these steps, your client can effectively manage and account for the expenses incurred before the nursery's official operations began in February. This approach ensures accurate financial reporting and compliance with accounting standards, setting a solid foundation for the nursery's financial management going forward.
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