Capitalizing Building Improvements
Let’s assume Company A makes improvements to its building, costing ₹5,00,000 on 01-07-2024. The improvements are expected to extend the building’s useful life by 10 years.
Journal Entry to Record Building Improvements:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-07-2024 | Building Improvements | 5,00,000 | Capitalizing the building improvements | |
| 01-07-2024 | To Cash/Bank | 5,00,000 | Payment for building improvements |
Journal Entry for Building Renovation as Revenue Expense
If the renovation is considered a revenue expense (e.g., regular maintenance or repairs), it is expensed immediately. Let’s assume the renovation cost is ₹1,00,000 on 01-08-2024.
Journal Entry to Record Building Renovation as Revenue Expense:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-08-2024 | Repairs and Maintenance Expense | 1,00,000 | Recording renovation as a revenue expense | |
| 01-08-2024 | To Cash/Bank | 1,00,000 | Payment for building renovation |
Explanation:
- Repairs and Maintenance Expense Account Debit: Records the cost of the renovation as an expense.
- To Cash/Bank Account Credit: Decreases the cash or bank account, reflecting the payment made for the renovation.
Journal Entry for Building Renovation as Capital Expense
If the renovation is considered a capital expense (e.g., significant improvements that extend the useful life of the building), it is capitalized and depreciated over time. Let’s assume the renovation cost is ₹5,00,000 on 01-09-2024.
Journal Entry to Record Building Renovation as Capital Expense:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-09-2024 | Building Improvements | 5,00,000 | Capitalizing the building renovation | |
| 01-09-2024 | To Cash/Bank | 5,00,000 | Payment for building renovation |
Explanation:
- Building Improvements Account Debit: Increases the asset account, reflecting the capital expenditure on the renovation.
- To Cash/Bank Account Credit: Decreases the cash or bank account, reflecting the payment made for the renovation.
Depreciation of Capitalized Renovation
Assuming the renovation will be depreciated over 10 years:
Annual Depreciation Expense:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2024 | Depreciation Expense | 50,000 | Recording annual depreciation | |
| 31-12-2024 | To Asset(Accumulated Depreciation) | 50,000 | Accumulating depreciation |
Explanation:
- Depreciation Expense Account Debit: Records the depreciation expense for the year (₹5,00,000 / 10 years = ₹50,000).
- To Asset(Accumulated Depreciation) Account Credit: Records the accumulated depreciation on the building improvements.