When a company incurs costs for the construction of a building, these costs are capitalized and added to the value of the building asset on the balance sheet rather than expensed immediately. Here’s how to record such a transaction.
Scenario:
A company incurs ₹1,500,000 in costs for the construction of a new building.
Journal Entry for Construction of Building:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Building A/c | 1,500,000 | |
| To Cash/Bank A/c | 1,500,000 | ||
| (Being cost of building construction capitalized) |
Explanation:
- Building A/c is debited to capitalize the cost of constructing the building.
- Cash/Bank A/c is credited to reflect the cash outflow for the payment.
Example with Different Details
Scenario: A company incurs ₹2,000,000 in costs for the construction of a new building.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Building A/c | 2,000,000 | |
| To Cash/Bank A/c | 2,000,000 | ||
| (Being cost of building construction capitalized) |
Adjustments for Multiple Payments and Financing
In reality, construction costs might be paid in installments or financed through loans. Here’s how to handle those scenarios.
Partial Payments:
Scenario: A company makes an initial payment of ₹500,000 towards the construction of a building.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Building A/c | 500,000 | |
| To Cash/Bank A/c | 500,000 | ||
| (Being initial payment for building construction) |
Financing through a Loan:
Scenario: A company finances the construction of a building through a loan of ₹1,000,000.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Building A/c | 1,000,000 | |
| To Loan A/c | 1,000,000 | ||
| (Being building construction financed through a loan) |
Combined Entry for Construction Costs and Loan:
Scenario: A company incurs ₹1,500,000 in costs for the construction of a building, with ₹500,000 paid in cash and ₹1,000,000 financed through a loan.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Building A/c | 1,500,000 | |
| To Cash/Bank A/c | 500,000 | ||
| To Loan A/c | 1,000,000 | ||
| (Being cost of building construction capitalized, partly paid in cash and partly financed through a loan) |
Summary:
Capitalizing construction costs ensures that the company's financial statements accurately reflect the value of its assets. This also aligns with accounting principles that match expenses with the periods in which the related benefits are realized.
