Stocks that the organisation deals with may be used in the process of building up an asset. Say, for example a trader who is trading in Rose Wood may use some wood for getting office furniture made up.

Recording - Journal Entry

Usage of stock for building assets is also an accounting transaction and has to be brought into the books of accounts through a journal entry.

• Debit - Asset a/c

  Based on the principle for valuation of an asset, all the expenses incurred before bringing the asset into usable condition would go into the value of the asset. Asset a/c shows a debit balance indicating its value. Thus the value of goods used in the construction of the asset should be debited to the relevant Asset a/c.

  Asset a/c ↓ Real a/c ↓ Debit [Debit what comes in]

• Credit

  The value of goods used in building up an asset represents the value of stock that been used for purposes other than trading.

  To ascertain the cost of goods sold, the value of stock used for purposes other than trading has to be deducted from the total value of goods by crediting one of the following ledger accounts.

  • Trading a/c
  • Cost of Goods Sold a/c
  • Purchases a/c
  • Stock used for Assets a/c

  Which account is credited is dependent on what comprises the value of abnormal loss stock and the account in which the related value exists at the time of recording the entry.

It would be appropriate to adjust the value of goods used for purposes other than trading from the account that holds the total value of goods. The total value of goods can be assumed to be existing as a debit balance in the Trading a/c to which all direct expenses are transferred at the end of the accounting period or in the Cost of Goods Sold a/c if it is being maintained and all the direct expenses are being transferred to it.

The value of goods used for purposes other than trading are to be deducted from the total value of goods (along with the value of good unsold) in arriving at the cost of goods sold. Since the total value exists as a debit balance, deducting from the total value requires the account holding the total value to be credited.

Thus the value of stock used in building an asset has to be credited to the Trading a/c or the Cost of Goods sold a/c in which the total value of goods/stock is existing as a debit balance.

Credited to Trading a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Assets a/c To Trading a/c	Dr	1,40,000	1,40,000
[For the value of goods used in constructing the asset]

Asset a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Balance b/d – To Trading a/c	– – 1,40,000	– –	– By Balance c/d	–
		–			–

Trading a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses To Gross Profit	– – – –	By Sales By Asset By Closing Stock	– 1,40,000 –
	–		–

Credited to Cost of Goods Sold a/c

Journal

Particulars		Amount (Dr)	Amount (Cr)
Asset a/c To Cost of Goods Sold a/c	Dr	1,40,000	1,40,000
[For the value of goods used in constructing the asset]

Asset a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Balance b/d – To Trading a/c	– – 1,40,000	– –	– By Balance c/d	–
		–			–

Cost of Goods Sold a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Direct Expenses	– – –	By Asset By Closing Stock By Trading a/c	1,40,000 – –
	–		–

Adjusting the goods used for purposes other than trading from the Purchases a/c would be rational under this circumstance.

The stock used is physically relatable to the stock that has been purchased during the current period and there are no direct expenses in relation to the stock purchased during the current period or the value of stock used does not include the direct expenses incurred during the current period.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Asset a/c To Purchases a/c	Dr	1,40,000	1,40,000
[For the value of goods used in constructing the asset]

Asset a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Balance b/d – To Trading a/c	– – 1,40,000	– –	– By Balance c/d	–
		–			–

Purchases a/c

DrCr
Particulars	Amount	Particulars	Amount
– –	– – –	– By Asset –	– 1,40,000 –
	–		–

During the accounting period

If the journal entry for recording the stock used for constructing an asset is being recorded any time during the accounting period, then Purchases a/c has to be credited since the Trading a/c and Cost of Goods sold a/c would not be available in the books of accounts as they are accounts that are created only towards the end of the accounting period.

If the organisation intends to maintain distinct information relating to the stock used for constructing the asset all throughout the accounting period since it is a frequent occurrence, then a separate ledger account by name Stock used for Assets is maintained and all stocks used for constructing assets are credited to that account.

Journal

Particulars		Amount (Dr)	Amount (Cr)
Asset a/c To Stock used for Assets a/c	Dr	1,40,000	1,40,000
[For the value of goods used in constructing the asset]

The Stock used for Assets a/c is a nominal account which provides the information relating to the total value of stock used for assets during the current accounting period. It's balance provides the answer to the question, "What is the total value of stock used for assets till now"? At the end of the accounting period, it is closed by transfer to the Trading a/c or the Cost of Goods sold a/c or the Purchases a/c depending on what the value in the account represents and which account holds the total value of that kind.

Asset a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
– – –	To Balance b/d – To Stock used for Assets a/c	– – 1,40,000	– –	– By Balance c/d	–
		–			–

Stock used for Assets a/c

DrCr
Particulars	Amount	Particulars	Amount
To Trading a/c	–	By Asset By Asset By Asset	– 1,40,000 –
	–		–

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period. Thus, for adjustments it would be appropriate to credit stock used for assets to either the Trading a/c or Cost of Goods Sold a/c or the Purchases a/c.

Conventionally it is credited to the purchases account.

Working notes for adjustments

Net Entry	Adjustment	Side	Where
Dr. Asset a/c Cr. Purchases a/c	1. (+) to Capital 2. (−) from Purchases	Assets Debit	B/S Trdg

Read as

1. Add to the relevant asset on the Assets side of the balance sheet.
2. Deduct from Purchases as stock used for assets on the debit side of trading account.

Trading a/c

DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Purchases − Stock used for Assets	12,50,000 1,40,000	11,10,000

Balance Sheet of M/s ______ as on 30^th June 20_6

Liabilities	Amount	Amount	Assets	Amount	Amount
			Asset + Stock used for Assets	– 1,40,000	–

The stock that is used for building up assets is stock that is used within the organisation. As such the stock used for assets has to be valued at cost based on the principle of mutuality which states that one cannot make a profit out of a transaction with one self.

Principle of Mutuality

Where there are adjustments which influence the value of the assets which are to be depreciated, proper attention should be paid on the date of the transaction.

The value of goods/stock enters the value of the asset on the date on which the transaction takes place. However, the date on which the transaction resulting in the value being taken into account may not be the same date. If it is being handled as an adjustment, the date of recording would be the last day of the accounting period.

If the transaction has already been recorded and there is no information to the contrary, we assume that the asset is brought into use on the same date on which the asset value is recorded.

The asset is to be depreciated from the date on which the asset has been brought into use.

Asset a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
01/01/_5 01/03/_5 31/12/_5	To Balance b/d To Cash/Bank To Trading a/c	8,00,000 2,00,00 1,40,000	31/12/_5 31/12/_5	By Depreciation on Asset By Balance c/d	– –
		–			–
01/01/_6	To Balance b/d	–

Because the adjustment is being handled towards the end of the accounting period, the asset value seems to have got into the account only on the last day of the accounting period.

Accounting period is 1 year [From 01/01/_5 to 21/12/_5]

Accounting for recording and posting depreciation would be the same irrespective of how depreciation is calculated. The variation in how depreciation is calculated will influence only the amount of depreciation charged.

• Depreciate for Specific Period

  Asset built using the stock brought into use from 15/10/_5.
  

  Depreciate the asset @ 10% p.a. on written down value.

  Since the date from which the value of the asset built using stock is brought into use is known and rate of depreciation is expressed in terms of period, we would be able to calculate depreciation for the specific period of use. Thus, the asset should be depreciated for the period of use.

  Depreciation

  • On the opening balance for the full period

    = 8,00,000 × 10%

    = 80,000

  • On the asset purchased during the period for 10 months

    [01/03/_5 to 31/12/_5]

    = 2,00,000 × 10% × 10/12

    = 16,667

  • On the asset value built using the goods/stock for two and half months

    [From 15/10/_5 ot 31/1/205]

    = 1,40,000 × 10% × 2.5/12

    = 2,917

  Total depreciation = 99,584 (80,000 + 16,667 + 2,917)

  Note

  If the rate of depreciation is not expressed in terms of period, then it would not be possible to calculate depreciation for the part period.

  Depreciate the asset by 10% - not in terms of period

  Depreciate the asset by 10% per anum - in terms of period

• Depreciate for Full Period

  Asset built using the stock brought into use from 15/03/_5.

  Depreciate the asset by 10%

  It would not be possible to calculate depreciation for part period though the date from which the asset has been brought into use is known, since depreciation is not expressed in terms of period.

  The asset has been brought into use towards the beginning of the accounting period. Thus, the value of the asset built up by the value of stock should be depreciated for the complete accounting period unless there is information to the contrary.

  Depreciation

  • On the opening balance for the full period

    = 8,00,000 × 10%

    = 80,000

  • On the asset purchased during the period for 10 months

    [01/03/_5 to 31/12/_5]

    = 2,00,000 × 10% × 10/12

    = 16,667

  • On the asset value built using the goods/stock for the full year

    = 1,40,000 × 10%

    = 14,000

  Total depreciation = 1,10,667 (80,000 + 16,667 + 14,000)

• Do not depreciate

  Asset built using the stock brought into use from 15/12/_5.

  Depreciate the asset by 10%

  It would not be possible to calculate depreciation for part period though the date from which the asset has been brought into use is known, since depreciation is not expressed in terms of period.

  The asset has been brought into use towards the ending of the accounting period. Thus, the value of the asset built up by the value of stock should not be depreciated for the accounting period unless there is information to the contrary.

  Depreciation

  • On the opening balance for the full period

    = 8,00,000 × 10%

    = 80,000

  • On the asset purchased during the period for 10 months

    [01/03/_5 to 31/12/_5]

    = 2,00,000 × 10% × 10/12

    = 16,667

  • On the asset value built using the goods/stock - none

    = 0

  Total depreciation = 96,667 (80,000 + 16,667 + 0)

Note

Where there is no specific indication with regard to the date of the transaction, it may be assumed to have taken place

• Towards the beginning of the accounting period, when the asset value has to be depreciated in full
• Towards the end of the accounting period, when the asset value should not be depreciated
• Somewhere in between the accounting period, when the asset value is depreciated for a period equal to half of the accounting period.

If such an assumption is made, it has to be specifically mentioned in the working notes to support the figures you are arriving at in your calculations.