Is A Rent Charge Considered A Service Item Or Non-inventory Item

This bookkeeping standard is applicable to all companies irrespective of their level (Level I, 2 and III). This standard prescribes the accounting handling for inventories and sets the guidelines to make up one's mind the value at which the inventories are carried in the fiscal statements.

It explains the different methods of accounting the inventory or closing stock which has a huge impact on the business organisation acquirement and the avails. Topics discussed in this article: In this commodity, we cover the following topics:

Valuation of Inventories

This Standard should be applied in accounting for all inventories except the following : (a) work in progress in the construction business, including directly related service contracts (b) work in progress of service business (consulting, banking etc) (c) shares, debentures and other financial instruments held as stock in trade (d) Inventories like livestock, agricultural and wood products, mineral oils etc These inventories are valued at net realizable value

Definition

I. Definition of the Inventory includes the post-obit:

A. Held for sale in the normal class of business i.e finished appurtenances

B. Appurtenances which are in the production process i.e work in progress

C. Raw materials which are consumed during production process or rendering of services (including consumable stores item)

II. Internet Realisable Value (NRV):

"Net realizable value is the estimated selling toll in the ordinary grade of business less the estimated costs of completion and the estimated costs necessary to brand the sale"

Valuation of Inventories

Inventories should exist valued at lower cost and net realizable value. Post-obit are the steps for valuation of inventories: A. Determine the cost of inventories B. Determine the net realizable value of inventories C. On Comparing between the toll and net realizable value, the lower of the two is considered as the value of inventory.

A comparison tin be made the detail by particular or past the group of items. (Refer Example studies given at the end of the article)

Let'south discuss the of import items of Inventory valuation in particular:

A. Cost of InventoriesThe cost of inventories includes the following

Purchase cost
Conversion price
Other costs which are incurred in bringing the inventories to their nowadays location and condition.

B. Cost of Purchase While determining the buy toll, the post-obit should exist considered:

Buy cost of the inventory includes duties and taxes (except those which are later on recoverable from the taxing authorities)
Freight inwards
Other expenditure which is direct attributable to the purchase
Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase

C. Cost of Conversion Price of conversion includes all cost incurred during the production process to consummate the raw materials into finished goods. Price of conversion also includes a systematic allocation of fixed and variable overheads incurred past the enterprise during the production process.

Following are the categories of conversion cost:

I. Direct Cost

All the toll directly related to the unit of production such as straight labor

Two. Fixed Overhead Cost

Stock-still overheads are those indirect costs which are incurred by the enterprise irrespective of production volume. These are the toll that remains relatively constant regardless of the volume of production, such as depreciation, edifice maintenance toll, assistants cost etc.

The allocation of stock-still production overheads is based on the normal capacity of the production facilities. In case of low production or idle institute resource allotment of these fixed overheads are not increased consequently.

III. Variable Overhead Toll

Variable overheads are those indirect costs of production that vary straight with the volume of production. These are the toll that will exist incurred based on the actual production volume such as packing materials and indirect labor.

D. Other Toll

All the other cost which are incurred in bringing the inventories to the current location and condition. For (eg) design price which is incurred for the specific customer order. If there are by-products during the production of master products, their price has to be separately identified. If they are not separately identifiable, so allocation can be fabricated on the relative auction value of the main product and the past-product. Some of the toll which should not be included are:

a. Price of whatever abnormal waste materials price

b. Selling and distribution price unless those costs are necessary for the production procedure

c. A normal loss which occurs during the product process is apportioned over the remaining no of units and abnormal loss is treated as an expense

(Refer Case studies given at the end of the article)

Methods of Inventory Valuation

The price of inventories of items which tin can exist segregated for specific projects should be assigned past specific identification of their individual costs (Specific identification method). All other items toll should be assigned by using the get-go-in, first-out (FIFO), or weighted boilerplate price (WAC) formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their nowadays location and condition.

However, when it is difficult to summate the cost using above methods, Standard cost and Retail price tin can exist used if the results approximate the bodily toll.

Accounting Disclosure

The post-obit should be disclosed in the fiscal statements:

Accounting policy adopted in inventory measurement
Cost formula used
Classification of the of inventory such every bit finished appurtenances, raw material & WIP and stores and spares etc
Conveying corporeality of inventories carried at fair value less sale cost
Amount of inventories recognized as expense during the flow
Amount of whatever write-down of inventories recognized as an expense and its subsequent reversal if any.

Comparison between AS 2 and ICDS

Given below are some of the key differences between As ii and Income Computation and Disclosure Standards (ICDS):

Sl.No	Particulars	Equally 2	ICDS
1	Methods of Valuation	Standard Cost and Retail toll methods are allowed if its close to actual cost	Standard Cost method is not allowed to be used
ii	Modify in method of valuation	Allowed if it provides more appropriate presentation	Non allowed unless there is a reasonable crusade
3	Opening Inventory of New Business	Value of opening inventory should be "Nil"	Shall exist the cost of inventory bachelor on the day of commencement of business

Some of the Major Differences between Ind As (IAS) and As 2

Scope of Equally 2 does not deal with the inventory treatment related to Service Providers whereas IAS 2 details the treatment related to the cost of inventories of Service Providers
AS 2 requires bottom disclosure in the financial statements when compared to IAS 2
Cost of Inventories does not include "selling and distribution costs" under AS ii and information technology is expensed in the menstruum in which they are incurred whereas IAS two specifically excludes only "Selling Costs" and not "Distribution Costs".
AS two requires the inventory value of goods which cannot be segregated for specific projects should be assigned using FIFO or WAC whereas IAS requires the same formula to be used for all the inventories with like nature.

Instance Studies and Examples

EXAMPLES:

NRV:
- Cost is 500 and NRV is 300 and so Inventory value as per AS-2 is 300
- Cost is 500 and NRV is 600 so Inventory value every bit per Every bit-2 is 600
- Cost is 500, Sale Toll is 700 and 30% commission, NRV is 490 (700-30%*700) so, Inventory value as per AS-ii is 490
Handling of Normal loss and abnormal loss: Company A purchased 100 items at the cost of Rs.10 each. Of which 10% is normal loss in general, there were no sales in that menstruation and closing stock was 80. Calculate the Inventory value:
Normal Loss = 100*10% = 10
Cost per item because normal loss = 100*10/ ninety = RS 11.11
Abnormal Loss is 90-eighty (Normal – closing stock) = 10
Toll of aberrant loss = Rs 111.eleven
Closing stock Value = Rs 888.89
Example Law Quick References: Some of the popular instance laws and its important decision for references:
- Chainrup Samapatram vs. C.I.T. (24 I.T.R. 481, 485);
- C.I.T. vs. Chari & Ram (17 I.T.R. 1, 7);
- Utting & Co. Ltd vs. Hughes (eight I.T.R. Supp. 57, lx)
  The assessee can get an allowance in respect of future unrealised loss, the Department is not entitled, by putting on the stock the market value where information technology exceeds toll, to bring in and charge the unrealised notional profit , unless the assessee's regular footing of valuation is the market place rate correct from the inception of his business.
- To the same result is the judgment in the case of C.I.T. vs. British Paints India Ltd (188 I.T.R. 44) information technology was held that it is a well-recognised principle of commercial bookkeeping to enter in the profit and loss business relationship the value of the stock-in-trade at the beginning and at the terminate of the bookkeeping year at price or marketplace price, whichever is the lower.
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