Query for a/cing for pre nursery school-kitchen & toys

This query is : Resolved

Ankit (Querist)
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29 July 2013 An entity(not a company) is engaged in running one Pre-nursery school and planning to open many more in future under a brand name.

For now FY13-14 they are incurring expenditure for food as meals for children and buys raw material like milk, fruits etc. Though this expense is revenue , I want to know the treatment of Kitchen crockery & cutlery and appliances like oven,juicer, stove etc, whether they are to be capitalised or not. If they are to be capitalised then what should be rate of depreciation and if they are to be amortised, then the manner and disclosure in notes on accounts

Also they have incurred hugh expense over toys ( vehicles, animals, first aid etc) for around 10 lacs, in addition to that they also bought a jumbo micky house alone costing near 4lacs, whether all these should be capitalised and what should be depreciation rate?

In FY12-13 they have incurred expenditure both revenue and capital but no commencement of business happen, whether revenue expenditure be treated as pre-operative expenditure? It should be capitalised to fixed asset or treated as Deferred revenue expenditure?

Thanks

Kumar

Kumar (Expert)
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01 August 2013 All such fixed assets need to be capitalised. Depreciation rate in case it is a company need to be equal to or higher than 13.91%

For other than company, there is no such minimum rate of dep.

Ascertain the estimated useful life of the assets and depreciate them accordingly, disclose the rate of depreciation used in financial statements

Revenue expenses need to be accounted in P&L if they are not incurred in connection with the construction of an asset. Especially corporate expenses such as audit fees etc need to be taken to P&L in any case

Ankit

Ankit (Querist)
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02 August 2013 Dear Rajesh Sir

with all due respect, so far your reply seems to be a general accounting statement.

I couldn't understand a meaning of it relating to my query, kindly give point by point response to my query as it will be very helpful for me.

Thanks

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 August 2024 Certainly! Here’s a point-by-point breakdown of how to treat the expenditures related to a pre-nursery school, including kitchen appliances, toys, and pre-operative expenses:

### **1. Treatment of Kitchen Crockery, Cutlery, and Appliances**

**1.1 **Kitchen Crockery and Cutlery:**
- **Classification:** These items are typically considered as consumables or minor assets, depending on their cost and expected life.
- **Treatment:**
- **If Expensive (High Cost):** If the cost is significant and they have a useful life extending beyond one year, they should be **capitalized** as Fixed Assets.
- **If Low Cost:** For lower-cost items, they might be treated as **revenue expenses** and directly charged to the income statement.

**1.2 **Kitchen Appliances (Oven, Juicer, Stove, etc.):**
- **Classification:** These are capital assets as they are used over a period longer than one year.
- **Treatment:**
- **Capitalization:** Capitalize these items as Fixed Assets in the books.
- **Depreciation:** Depreciate these appliances according to their estimated useful life. In India, typical rates for depreciation are:
- **Appliances:** 15% on a Written Down Value (WDV) basis.
- **Crockery and Cutlery (if capitalized):** 25% on WDV basis (if they are considered fixed assets).

**1.3 **Amortization vs. Depreciation:**
- **Depreciation** is used for tangible fixed assets.
- **Amortization** is used for intangible assets, but since we’re dealing with tangible items like crockery and appliances, depreciation applies.

### **2. Treatment of Toys and Jumbo Micky House**

**2.1 **Toys (Vehicles, Animals, etc.):**
- **Classification:** If these toys are purchased for long-term use, they should be treated as capital assets. For instance, if they have a useful life extending beyond one year.
- **Treatment:**
- **Capitalization:** Capitalize these toys as Fixed Assets.
- **Depreciation Rate:** Typically, toys would be depreciated at a rate of 25% on WDV basis.

**2.2 **Jumbo Micky House:**
- **Classification:** Since the cost is substantial and it will be used over a longer period, it should be capitalized.
- **Treatment:**
- **Capitalization:** Capitalize as a Fixed Asset.
- **Depreciation Rate:** The rate could be around 25% on WDV basis, but this might vary based on the specific useful life estimation.

### **3. Treatment of Pre-operative Expenditure (FY12-13)**

**3.1 **Revenue vs. Capital Expenditure:**
- **Revenue Expenditure:** These are expenses incurred for running the business and are usually charged to the income statement in the year incurred.
- **Capital Expenditure:** These are expenses that result in the acquisition of assets and are capitalized.

**3.2 **Pre-operative Expenditure:**
- **Capitalization:** Pre-operative expenses incurred before the commencement of business are typically **capitalized** and added to the cost of fixed assets or treated as pre-operative expenses.
- **Deferred Revenue Expenditure:** It can be amortized over a period (usually 5 years) if it’s substantial and relates to specific aspects of the business setup.

### **4. Summary**

1. **Kitchen Items:**
- **Crockery and Cutlery:** Capitalize if significant; otherwise, treat as revenue expense.
- **Appliances:** Capitalize and depreciate at 15% WDV.

2. **Toys and Jumbo Micky House:**
- **Toys:** Capitalize and depreciate at 25% WDV.
- **Jumbo Micky House:** Capitalize and depreciate at 25% WDV.

3. **Pre-operative Expenses:**
- **Capitalize** and treat as pre-operative expenditure. Amortize over a period if substantial.

**Notes on Accounts:**
- Clearly disclose the capitalization policy, depreciation rates, and treatment of pre-operative expenses in the notes to the financial statements.

If you need specific guidance or have further questions, consulting with a professional accountant or auditor is advisable to ensure compliance with accounting standards and regulations.