Capital work in progress represents costs incurred to date on a fixed asset which is still under construction at the balance sheet date.
This concept is more relevant immovable assets like “Building” where an organization is in the process of constructing it or the phase of procuring and setting up “Plant and Machinery” which may take longer periods of time.
The costs being incurred on such assets cannot be recognized as an operating asset until they qualify as a ready to use asset. All costs incurred on assets under construction are recorded as “Capital work in progress (CWIP)” and on completion and readiness of asset these are transferred to “Operating Fixed Assets” account.
A company is constructing its sales office building. Following expenditures have been incurred to date.
Following accounting entries will be passed to record the expenditure on CWIP assets:
The following accounting entry will be passed once assets is ready to use:
Depreciation is not recorded against CWIP assets. Depreciation is started only when the asset is transferred from CWIP to fixed assets.