Provision for the Excise duty on Finished goods

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Manoj Mangal (Querist)
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23 May 2011 I have Valued the finished goods Inventory (i.e. NRV or Cost whichever is lees)in accordance with Accounting Standard-2 on Valuation of Inventories Issued by ICAI.

I have to create the Provision for excise duty on finished goods, pl. suggest me on which amount provision should be created, either on sales value or cost of the FG or Value as per valuation of Finished goods.

Pl. send your valuable suggestion......

Manoj Mangal

Manoj Mangal (Querist)
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12 June 2011 send the opinion on this issue.....

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 August 2024 In accounting for the provision for excise duty on finished goods, the key is to align with the principles set out by relevant accounting standards and guidelines. Here's a detailed approach to determine the provision for excise duty:

### **1. Understanding Provision for Excise Duty:**

- **Provision for Excise Duty:** This is a liability that needs to be recognized for the excise duty payable on finished goods at the time of their production or storage, irrespective of whether they have been sold or not.

### **2. Basis for Creating Provision:**

The provision for excise duty should be created based on the value of the finished goods as recognized in the financial statements. Here’s how to approach it:

#### **A. Cost or Net Realizable Value (NRV):**

- **Cost of Finished Goods:** This includes all costs directly attributable to bringing the goods to their present location and condition.
- **Net Realizable Value (NRV):** This is the estimated selling price of the goods less any costs necessary to make the sale.

According to **Accounting Standard (AS) 2 - Valuation of Inventories**, inventory should be valued at the lower of cost or NRV.

#### **B. Provision for Excise Duty:**

1. **Calculation Basis:**
- **Value of Finished Goods for Provision:** The provision for excise duty should be created on the value of finished goods as per the valuation (i.e., the lower of cost or NRV) in the financial statements.
- **Include Excise Duty in Cost:** Excise duty that is legally payable should be included in the cost of finished goods. Thus, the provision should be based on the value recognized in the books, which includes the excise duty.

2. **Example Calculation:**
- Suppose you have finished goods valued at INR 1,000,000 as per cost.
- NRV of the finished goods is INR 950,000.
- Let’s assume the excise duty rate is 12% on the cost.
- Excise Duty: 12% of INR 1,000,000 = INR 120,000.

**Provision for Excise Duty:**
- You would create a provision for excise duty of INR 120,000 based on the cost of finished goods.

#### **C. Financial Statements Impact:**

- **Balance Sheet:** The provision for excise duty should be shown as a liability on the balance sheet.
- **Profit and Loss Account:** The excise duty is included in the cost of goods sold or as an expense, thereby impacting the net profit.

### **Summary:**

- **Create Provision:** The provision for excise duty should be based on the value of finished goods as per the valuation (i.e., cost or NRV, whichever is lower).
- **Account for Excise Duty:** Excise duty should be factored into the cost of finished goods, and provision should reflect the excise duty applicable on that value.

This approach ensures that the provision for excise duty aligns with the valuation principles set by AS 2 and reflects the true cost of finished goods, including applicable taxes.

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