To begin with, let me first give you a small explanation of what Contingent assets are A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event. To make it clear with anRead more
To begin with, let me first give you a small explanation of what Contingent assets are
A contingent asset is a potential asset or economic benefit that does not exist currently but may arise in the near future. Such an asset arises from an uncertain and unpredictable event.
To make it clear with an example: String Co. filed a lawsuit against a competitor company Weave Tech Co. for infringing on company ABC’s patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings Co. general ledger accounts until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.
Disclosing Contingent Assets
- The probability of occurrence is virtually certain or probable: It will be disclosed as an asset in the balance sheet.
For Example, The court orders for reimbursement to Strings Co. say 1,00,000 for the damages, but it has not yet received the money. Although it is virtually certain that the company will receive the money in the near future, it will be treated as an asset and can be disclosed in the balance sheet on the assets side.
- The probability of occurrence is probable: It will be disclosed as notes to accounts below the balance sheet.
For Example, Strings Co. filed a lawsuit against a competitor company Weave Tech for infringing on Strings Co. patent. Even if it is probable (but not certain) that Strings Co. will win the lawsuit, it is a contingent asset.
As such, it will not be recorded in Strings company’s general ledger until the lawsuit is settled.
At most the Strings Co. can do is, prepare a note disclosing the fact that it has filed the lawsuit the outcome of which is uncertain.Â
- The probability of occurrence is remote or not probable:Â Â It will not be treated as a contingent asset.
In this case, the disclosure of it is not permitted.
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As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short. CWIP is the work which is not yet completed but the amount for which has already been paid. Suppose, at the time of preparing a balance sheet, ifRead more
As per Wiki, it is also called construction in progress. Capital work in progress is a non-current asset of an entity. It is also known as CWIP in short.
CWIP is the work which is not yet completed but the amount for which has already been paid.
Suppose, at the time of preparing a balance sheet, if an asset is not completed, all the costs incurred on that asset up to the balance sheet date are to be transferred to an account called capital work in progress.
Example 1: A machinery under installation.
There are several expenses incurred while installing machinery, expenses such as labor charges, Initial delivery and handling costs, Assembly and installation cost, etc are included in CWIP and when the asset is completed and is ready to use, all the costs are transferred to the relevant accounts.
To make it simpler, let me show journal entries relating to this example.
When an expense is incurred/paid:
When an asset is complete and put to use:
Example 2:Â A Contractor is constructing a building. The following expenditures are being incurred to date:
i) Raw materials – 5,00,000
ii) Payment to Architect – 3,50,000
iii) Advance for Equipments – 1,50,000
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets are ready to use:
Disclosure in the Balance sheet
CWIP account is shown separately in the balance sheet below the fixed asset.
we cannot depreciate capital work in progress. It can only be depreciated when the asset is put to use.
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