Skip to main content
A
AnkitaU1
May 27, 2021
Solved

Real Estate Accounting - Business of Purchase, rehab and sale of property

  • May 27, 2021
  • 1 reply
  • 0 views

Hi, 

 

Someone has real estate business in which they have purchased a property for the purpose resale and once they get the necessary permits, they will create a new house after demolishing existing one. Meanwhile they have given the property on rent (incurred some remodelling charges) as getting permissions will take aound12 months time. So my questions are:

1. Will the property be inventory or fixed asset in the balance sheet?

2. Noted that all Construction costs will be capitalised but do we need to capitalise Carrying cost also?

Best answer by amitmundhra

@AnkitaU1 

 

1. In this case, according to Indian GAAP, only direct costs needs to be capitalised to the cost of inventory. Interest is not a direct cost, hence cannot be capitalised to increase the value of the inventory.

 

2. In case you want to see the category wise costs, you can create a different chart of account for each category and sub group it to the COGS. This way you can see the combined as well as the detailed report.

 

Hope this helps.

 

1 reply

amitmundhra
amitmundhra
May 27, 2021

Hi

 

If the primary business is dealing into real estate, then even though a particular real estate is being held for more than 1 year, it may be classified as inventory. Whatever expenses you incur on the development of such real estate should increase the value of inventory.

 

A
AnkitaU1Author
May 27, 2021

@amitmundhra 

Thanks for your response. 

So if we have taken loan for purchase of property, all monthly interest payments are required to be capitalised?

 

Also, how should we show every expense incurred in QB. Suppose we incurred construction cost with several categories like Rough Electrical, Rough Plumbing, Demo costs etc and the client wants to see all these details category wise. If we directly add all cost to inventory, we won't be able to pull category wise report. Please suggest. 

 

Thanks..

amitmundhra
amitmundhraAnswer
May 28, 2021

@AnkitaU1 

 

1. In this case, according to Indian GAAP, only direct costs needs to be capitalised to the cost of inventory. Interest is not a direct cost, hence cannot be capitalised to increase the value of the inventory.

 

2. In case you want to see the category wise costs, you can create a different chart of account for each category and sub group it to the COGS. This way you can see the combined as well as the detailed report.

 

Hope this helps.

 

    Terms & ConditionsAccessibility statement