Treatment of Liquidated Damages in books of contractee.

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Aurabinda Sil (Querist)
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16 January 2020
Our company a PSU, constructs new electrical sub stations and undertakes up gradation of electrical infrastructures and for this places orders to contractors. Contractors delay in completion of projects and LD is imposed by our company on the contractors and collects LD from contractors by way of deduction from their bills. What will be the treatment of LD in books of accountants of our company, i.e. can it be capitalized / reduced from the values of CWIP/Fixed Assets or can it be shown as an other income in books of account ? Please advise.

Amol S Joglekar

Amol S Joglekar (Expert)
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16 January 2020 In common parlour, it is treated as deposit and hence shown as liability. Normally the defect liability period is 5 years in most of the cases.
If defects are not noticed within the period of 5 year, the deposit is returned to contractor.
However, the charges levied for delay should go to other income.
Assuming contractor's bill is for 100, out of which 10 to be deducted as damages for delay.
Debit Contractor's account 10, Credit Other Income (For charging damages for delay)
Debit Purchases 100 Credit Contractor 100 (For recording R/A bill submitted by contractor)
Debit Contractor's account 90 Credit Bank 90 (For payment