The construction of a building is considered a capital expenditure, which means it will be recorded as an asset in the company’s books and depreciated over its useful life. Below is an example scenario and the necessary journal entries for recording the construction of a building.
Example Scenario
Let’s assume Company A is constructing a new building, and the total cost incurred is ₹50,00,000. The construction is completed on 01-10-2024.
Journal Entries
1. Recording the Costs Incurred During Construction
Throughout the construction period, various expenses such as materials, labor, and overhead costs are incurred. These costs are accumulated under an Construction Work-in-Progress account.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| Various Dates | Construction Work-in-Progress | 50,00,000 | Accumulated costs for building construction | |
| Various Dates | To Cash/Bank/Suppliers | 50,00,000 | Payments for construction expenses |
Explanation:
- Construction Work-in-Progress Account Debit: Accumulates all the costs associated with the construction.
- To Cash/Bank/Suppliers Account Credit: Reflects payments made to various parties involved in the construction process.
2. Capitalizing the Completed Building
Once the construction is completed, the total accumulated cost in the Construction Work-in-Progress account is transferred to the Building account.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-10-2024 | Building | 50,00,000 | Capitalizing the completed building | |
| 01-10-2024 | To Construction Work-in-Progress | 50,00,000 | Transferring accumulated construction costs |
Explanation:
- Building Account Debit: Capitalizes the cost of the completed building as an asset.
- To Construction Work-in-Progress Account Credit: Removes the accumulated construction costs from the Work-in-Progress account.
3. Depreciation of the Building
The building will be depreciated over its useful life. Assuming a useful life of 20 years and using the straight-line method, the annual depreciation expense would be:
Annual Depreciation Expense = ₹50,00,000 / 20 years = ₹2,50,000
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-03-2025 | Depreciation Expense | 2,50,000 | Recording annual depreciation | |
| 31-03-2025 | To Accumulated Depreciation – Building A/c | 2,50,000 | Accumulating depreciation |
Explanation:
- Depreciation Expense Account Debit: Records the annual depreciation expense.
- To Accumulated Depreciation – Building Account Credit: Accumulates the depreciation on the building over its useful life.