A

SUMMER INTERNSHIP REPORT ON

CAPITALIZATION
SUBMITTED TO:

D.A.V. UNIVERSITY, JALANDHAR

In partial fulfillment of the requirement for the award of degree of

Master of Business Administration (MBA)

Submitted by:

Tarunpreetkaur

12200755

Session (2022-2024)

Project guide:

Mr. O.P. Samkria

(HOD ACCOUNTS)

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2
 DECLARATION:

This is to certify that the project report entitled

“CAPITALIZATION” is a bonafide piece of work conducted
under the supervision of Mr. O.P. Samkria (HOD Accounts) .No
part of this work has been submitted for any other degree of any
university. The data sources have been duly acknowledged.
Date:
Signature:
Tarunpreetkaur

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 ACKNOWLEDGEMENT
I take this opportunity to express my deep gratitude towards Vardhman
Spinning and General Mills for the invaluable assistance during my
summer internship. It is my privilege to express my gratitude to the
Placement office of D.A.V. University” for successful arranging
internship program for us.
I would like to express profound gratitude to my honorable Company
Guide Mr. O.P. samkria (HOD Accounts)
I am really fortunate that I had the kind association as well as supervision
of Mr. SandeepDadhwal (Executive) who is providing me constant
support and feedback to carry out this project.

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 TABLE OF CONTENT:
Title

Certificate

Declaration and Acknowledgement

Table of content

Introduction to company

CONCEPTS: DETAIL

1 ASSETS

Importance of fixed assets

Types of assets

2 PROCESS OF PURCHASING ASSETS AT VARDHMAN

Proposal

Committee

Approval

Generation of internal order number

3 FIXED ASSETS

Nature

Useful life of fixed assets

4 DEPRECIATION

Causes

Methods

Calculation

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5 CAPITALIZATION

Importance

Calculation

6 CAPITAL WORK IN PROGRESS

Journal entries

When to capitalize?

Details to maintain

How to capitalize?

7 SALE OF ASSET

8 TRANSFER OF ASSET

RECOMMENDATION

CONCLUSION

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INTRODUCTION:
Vardhman Textiles Ltd. Is one of the leading textile companies in India, headquartered in
Ludhiana, Punjab. The company was established in 1965 by Shri Lala Rattan Chand. It started
with a small spinning unit with a capacity of 6,000 spindles and today, has grown to become
leading textile company in India. With more than 5 decades of presence, Vardhman group is
today among the leading textile conglomerates in the country, with a turnover of $1.1 billion.
Vardhman has the largest spinning capacity in the Country with over 1.2 million spindles. It has
diversified into Manufacturing yarn, fabric, acrylic fiber, garments, sewing thread, and alloy
steel. The group has 18 manufacturing units spread over 6 states and Employs approximately
4400 staff members 24,783 workers.

Vardhman is the first organization among the textile industry to receive the ISSO 9001/ ISO
14000 quality certification in India.

 Corporate Identity Number (CIN): L17111PB1973PLC003345

 PAN: AABCM4692E
 Website:www.vardhman.com

Vardhman group was incorporated in 1962 as Vardhman Spinning & General Mills (VSGML).
The company was promoted by VS Oswal and RC Oswal initially and is now headed by S. P.
Oswal Jain.

The holding company in this case is Vardhman Holdings limited and the group companies are
Vardhman Textiles (61%), Vardhman Industries (65%) and Vardhman Acrylic (60%).
Vardhman textiles in-turn has holding in VMT Spinning (73.33%), Vardhman threads (100%)
and Vardhman yarns and threads (11%).

With a turnover of more than a billion dollar, Vardhman is the largest

vertically integrated textile manufacturing.

 VISION: Rooted in values, creating world class textiles.

 MISSION: Vardhman as a world – class textile organisation aims at producing diverse

range of product for the global textile market.

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 GOALS: To make maximum utilisation of resources to innovate diversify, integrate and
build a dynamic enterprise.

 VALUES OF THE COMPANY:

 Faith in bright future of Indian textiles and hence, continued expansion in areas
that we know best.
 Total customer focus in all operation areas.
 Offer products of best available quality for premium market segments.
 Integrated diversification and product range expansion.
 Faith in individual potential and respect for human values.
 Accept change as a way of life.
 Appreciate our role as responsible corporate citizens.

 DIVERSIFIED PORTFOLIO:
 YARN: Company represents the yarns business,which is the largest strategic business
units of the group with a capacity to manufacture over 2,40,000 MT of yarn per annum.
It is led by Mr. Neeraj Jain.

 FABRIC: It is a leading fabric producer in India with fabrics contributing about 30%
to group’s revenue and is serving large retailers in USA, Europe, Asia and many more.
It is led by Ms. Suchita Jain.

 ACRYLIC FIBRE: Vardhman Acrylics Ltd. Is into manufacture of acrylic fiber and
acrylic tow since 1999.A modern plant has been set up in Bharuch, Gujrat for wet
spinning and process control was set up with a capacity of over 16,500 MT per annum.
It is led by Mr. B.K. Choudhary.

 SEWING THREAD: In the year 1982, the group entered the sewing thread market
with its plant atHoshiarpur. It is led by Mr. SanjeevNarula.

 GARMENTS: It has been producing a high end premium quality formal shirts for
large retail brands for international and national markets since 2011. It has a capacity
of over 1.8 million shirts per annum. It is one of the post cure wrinkle free shirts
manufacturers in India with hallmarks and certifications of quality. It is led by Mr. DK
Sindhwani.

 SPECIAL & ALLOY STEELS: In 1986, Vardhman Special Steels came into
existence. It supplies its products to most stringent buyers like Mercedes, Toyota,
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 Porsche and many others. It had a capacity of 2 lakh tons per annum and contributes
9% of the total turnover of the company. It is led by Mr. Sachit Jain.

 VARDHMAN RENOVA: It is the first plant in the country to manufacture yarn from
waste material. This was established in November 2021, uses spinning hard waste as a
raw material to manufacture yarn. It has a capacity of 6 TPD and is headed by Mr.
Gurpreet Singh.

 LOGO OF VARDHMAN

The “FLAME” signifies growth i.e. Growth the company along with the growth of each and
every individual associated with it whether he/she is a worker, an employee, employer,
shareholders and customers.

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The “STICK” symbolizes cotton that is the basic raw material of the core product of
Vardhman.

The “V” stands for the Vardhman Group.

 MAJOR PLAYERS OF TEXTILE INDUSTRY

Here is the list of top 5 textile companies in India.

1. Arvind Ltd- Arvind Ltd was started in the year 1931. The company is
headquartered in Ahmedabad, India. It is offering a range of products including
Denim, Knits, and Woven etc. It is one of the top denim manufacturers in India. The
company is also running its retail and clothing chain.

2. Vardhman Textiles Ltd -Vardhman Group is a textile group based in Ludhiana,

Punjab, India. Vardhman Group was established in 1965 by Lala Rattan Chand
Oswal.

3. Bombay Dyeing and Manufacturing Company Ltd-Bombay Dyeing and

Manufacturing Company is one of the top textile companies in India. It was founded
in the year 1879. It is Flagship Company of Wadia Group. It is offering wide range of
products including Bed Linen, Furnishings, and Towels.

4. Grasim Industries Ltd - Grasim Industries Ltd was founded in the year 1948 in
Mumbai. Headquarter is located in Mumbai, Maharashtra. It is the subsidiary of
Aditya Birla Group. Grasim Industries is one of the world’s largest producer of
Viscose Staple Fiber. Aditya Birla Group is the parent company of Grasim Industries
Ltd. It is exporting its products to various countries.

5. Raymond Ltd -Raymond Ltd was founded in the year 1925. It is headquartered in
Mumbai, India. It is producing wide range of products including fabrics, garment,
designer wear, denim etc. It is among the most trusted fabric brands in India.
Raymond opened retail shops all across India and overseas as well.

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  PHILOSOPHY

The Vardhman Group has always emphasized on total customers focus in all operational areas.
It has continuously nurtured relationship with all the customers and its focus is on service
orientations. The Group philosophy of Vardhman includes:

 Faith in bright future of Indian textiles and hence continued expansion in areas "which
we know best".
 Total customer focus in all operational areas
 Products to be of best available quality for premium market segments through TQM and
zero defect implementation. All functional areas.
 Global orientation targeting - at least 20% production for exports.
 Integrated diversification/product range expansion.
 World class manufacturing facilities with most modern R&D and process technology.
 Faith in individual potential and respect for human values.
 Encouraging innovation for constant improvements to achieve excellence in all
functional areas.
 Accepting change as a way of life
 Appreciating our role as a responsible Commercial citizen.

VARDHMAN TEXTILES LTD.

COMPANY PROFILE

Registered office/ Commercial office : Chandigarh Road, Ludhiana, Punjab

Date of incorporation : 27 December, 1962

Listings on Stock Exchange : Bombay Stock Exchange, Bombay

National Stock Exchange, Mumbai

Stock Code : 502986 (In BSE) VTL (In NSE)

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 FIRMS UNDER VARDHMAN TEXTILES LTD.

S.No. NAME LOCATION

1. Vardhman Spinning and General Mills Ludhiana, Punjab

2. Mahavir Spinning Mills Baddi, HP

3. Arihant Spinning Mills Malerkotla

4. Mahavir Spinning Mills Hoshiarpur

5. Arisht Spinning Mills Baddi, HP

6. Auro Spinning Mills Baddi, HP

7. Auro Weaving Mills Baddi, HP

8. Auro Dyeing Baddi, HP

9. Auro Textiles Baddi, HP

10. Vardhman Spinning Mills Baddi, HP

11. Mahavir Spinning Mills, Textile Baddi

Division

12. Anant Spinning Mandideep, Bhopal, MP

13. Vardhman Fabrics Bhudni,MP

14. Vardhman Yarns Satlapur, MP

 DIFFERENT DEPARTMENTS OF VARDHMAN

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COMMERCIAL DEPARTMENT
 Marketing
 Costing
 Accounts
 Material

ADMINISTRATIVE DEPARTMENT
 Industrial relations
 Personnel department
 Transport
 Security
 Establishment (dispatch & issue)
 Electronic data process

PRODUCTION DEPARTMENT
 Spinning I
 Spinning II
 Post Spinning I
 Post Spinning
 Worsted I, II
 Hand Knitting section
 Research & Development
 Dye house – unit- II

ENGINEERING DEPARTMENT
 Electronic department
 Civil department
 Mechanical department

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OBJECTIVES OF REPORT:
1. To understand the concept of purchasing assets in Vardhman.
2. To know the process of capitalization of assets.

 CONCEPT-1
ASSETS:
An asset is something of value that an individual, company, or organization owns or
controls, which has the potential to generate future economic benefits. Assets can take
various forms and are typically categorized based on their characteristics and purpose.
Here's a breakdown of the definition, types, and examples of assets:

 Definition:

An asset is a resource that is expected to provide future economic benefits. It can be tangible,
such as physical property or equipment, or intangible, such as intellectual property or financial
instruments. Assets are recorded on the balance sheet of an individual or an organization,
representing their ownership or control over these valuable resources.

 Importance of fixed asset to industries:

Fixed assets play a crucial role in the industrial sector. Here are some key reasons why fixed
assets are important to industries:

1. Production and Operations: Fixed assets, such as machinery, equipment, and

infrastructure, are essential for production and operational processes in industries. They enable
companies to manufacture products, provide services, and carry out day-to-day operations
efficiently and effectively. Without these assets, industrial operations would be significantly
limited or even impossible.

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2. Capacity and Scalability: Fixed assets provide industries with the capacity to handle larger
volumes of production. They enable companies to scale their operations, meet growing demand,
and expand their market presence. Fixed assets allow industries to increase their output,
improve productivity, and achieve economies of scale, leading to cost efficiencies and
competitive advantages.

3. Quality and Consistency: Industries rely on fixed assets to maintain consistent product
quality and operational standards. Specialized machinery and equipment are designed to
perform specific tasks with precision, ensuring reliable and standardized output. Fixed assets
help industries maintain consistent product quality, adhere to regulatory requirements, and meet
customer expectations.

4. Innovation and Technological Advancement: Investments in fixed assets often involve

adopting new technologies and innovations. Upgrading or acquiring advanced machinery and
equipment can enhance productivity, improve product quality, and optimize manufacturing
processes. Fixed assets enable industries to embrace technological advancements, stay
competitive in the market, and drive innovation within their sectors.

5. Long-Term Cost Efficiency: While fixed assets require significant upfront investment, they
offer long-term cost efficiency. By owning assets rather than relying on constant rentals or
outsourcing, industries can reduce operational costs over time. Fixed assets, when properly
maintained and utilized, can provide a return on investment that outweighs the expenses
associated with their acquisition and maintenance.

7. Depreciation and Tax Benefits: Fixed assets are subject to depreciation over their useful
lives, which allow industries to allocate the cost of assets over time for accounting and tax
purposes. Depreciation expenses can reduce taxable income, resulting in potential tax benefits
for industries.

Overall, fixed assets form the foundation of industrial operations, enabling companies to
produce goods and services efficiently, maintain quality standards, and support growth and
innovation. Effective management and maintenance of fixed assets are vital for industries to
optimize their productivity, profitability, and long-term success.

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 Types of Assets:

1. Current Assets: These are assets that are expected to be converted into cash or used up
within a short period, typically one year. They include:
 Cash and cash equivalents
 Marketable securities
 Accounts receivable (money owed by customers)
 Inventory
 Prepaid expenses

2. Fixed Assets (or Property, Plant, and Equipment): These are long-term tangible assets
with a useful life extending beyond one year. They are used in the production or
operation of a business and include:
 Land and buildings
 Machinery and equipment
 Vehicles
 Furniture and fixtures
 Leasehold improvements

3. Tangible Assets: These are assets that have a physical presence and can be touched or
seen. They include both current and fixed assets and examples include:
 Cash
 Inventory
 Land and buildings
 Machinery and equipment
 Vehicles

4. Intangible Assets: These are non-physical assets without a physical existence, but they
hold value for a company or individual. Examples include:
 Intellectual property (patents, trademarks, copyrights)
 Brand names and logos
 Goodwill (the reputation and customer loyalty of a business)
 Software
 Customer lists and relationships

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 5. Operating Assets: These are assets that are directly involved in the day-to-day
operations of a business. They are essential for generating revenue and include both
tangible and intangible assets. Examples include:
 Inventory
 Machinery and equipment
 Patents and trademarks
 Accounts receivable

6. Non-operating Assets: These are assets that are not directly related to the core
operations of a business. They may generate income, but their primary purpose is not
revenue generation. Examples include:
 Investments in other companies
 Surplus or idle assets
 Intellectual property not used in the core business
 Non-core real estate holdings

It's worth noting that some assets can fall into multiple categories. For example, a company's
building can be considered both a fixed asset and a tangible asset. The categorization of assets
helps individuals and organizations understand and manage their resources effectively.

 CONCEPT-2
THE PROCESS OF PURCHASING ASSETS IN
VARDHMAN:
PROPOSAL:

When proposing the purchase of fixed assets, it's important to provide a comprehensive and
well-structured proposal to support your request. Here are some key elements to include in your
proposal:

 Introduction: Begin by introducing the purpose of the proposal and provide a brief
overview of the organization or department for which the fixed assets are being

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 requested. Clearly state the need for the assets and how they will contribute to the
organization's goals and objectives.

 Asset Description: Provide a detailed description of the fixed assets you are proposing to
purchase. Include information such as the type of asset, model or specifications, quantity
needed, and any specific features or requirements.

 Justification: Explain the rationale behind the purchase of the fixed assets. Describe the
benefits and advantages they will bring to the organization. Highlight how they will
enhance productivity, efficiency, quality, safety, or any other relevant aspects of
operations. You can also mention any anticipated cost savings or revenue generation
resulting from the assets.

 Cost Analysis: Present a detailed cost analysis for the proposed fixed assets. Include the
individual cost of each asset, installation or setup expenses, any necessary accessories or
additional equipment, and any on-going maintenance or operating costs. Provide a total
cost estimate for the entire project.

 Alternatives and Comparisons: Provide a comparison of different options, if available,

and explain why the proposed assets are the most suitable choice. Consider factors such
as quality, durability, performance, maintenance requirements, and vendor reputation. If
applicable, include quotes or proposals from multiple suppliers to demonstrate
competitive pricing and value for money.

 Implementation Plan: Outline the implementation plan for acquiring and integrating the
fixed assets into the organization. Include details on procurement processes, delivery
timelines, installation or setup requirements, training needs, and any potential disruptions
to on-going operations. Emphasize any contingency plans or risk mitigation strategies.

 Long-Term Benefits and Sustainability: Highlight any long-term benefits or sustainability

aspects associated with the proposed assets. Consider factors such as energy efficiency,
environmental impact, compliance with regulations or industry standards, and potential
for future upgrades or scalability.

 Supportive Documentation: Attach supporting documents, such as technical

specifications, vendor brochures, cost estimates, quotations, and any relevant research or
market analysis.
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  Conclusion: Summarize the key points of your proposal, reiterate the importance and
benefits of acquiring the fixed assets, and request approval or further consideration.
Express your willingness to provide additional information or answer any questions that
may arise.

COMMITTEE:

Committees play a crucial role in the purchasing process within an organization. Their purpose
is to ensure transparency, accountability, and informed decision-making when acquiring goods
or services. Here are some key aspects of committee work in purchasing:

 Composition: A purchasing committee typically consists of members from various

relevant departments or functions within the organization. This may include
representatives from finance, operations, procurement, legal, and end-users or
stakeholders who will be impacted by the purchase. The committee should have a diverse
range of expertise and perspectives to make well-rounded decisions.

 Objective and Scope: The committee's objective is to oversee the purchasing process and
make recommendations or decisions regarding procurement. The scope of their work
may include setting procurement policies and procedures, evaluating potential suppliers,
reviewing and approving purchase requests, negotiating contracts, and monitoring vendor
performance.

 Roles and Responsibilities: Each committee member has specific roles and
responsibilities. These may include gathering and analysing information about potential
vendors, assessing the technical and financial aspects of proposals, conducting due
diligence, reviewing contract terms and conditions, evaluating pricing and cost
implications, and making final recommendations or decisions.

 Vendor Selection: The committee plays a crucial role in selecting vendors or suppliers.
They may develop criteria or evaluation factors to assess vendor qualifications, such as
financial stability, experience, reputation, quality standards, compliance with regulations,
and ability to meet delivery timelines. The committee evaluates vendor proposals,
conducts interviews or site visits if necessary, and ultimately selects the most suitable
vendor.

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  Decision-Making Process: Committee decisions are typically made through a
collaborative and democratic process. Members discuss options, share their insights and
concerns, and reach a consensus or majority agreement. The decision-making process
may involve evaluating pros and cons, conducting cost-benefit analyses, considering risk
factors, and aligning decisions with the organization's goals and budgetary constraints.

 Documentation and Records: The committee ensures that all purchasing activities are
documented and recorded accurately. This includes maintaining minutes of meetings,
tracking vendor communications, documenting the rationale behind decisions, and
keeping a record of any supporting documents or information considered during the
procurement process. These records serve as a reference for transparency, auditing, and
future evaluations.

 Compliance and Ethics: The committee upholds ethical standards and compliance with
relevant laws, regulations, and organizational policies. They ensure that the purchasing
process is fair, transparent, and free from conflicts of interest. They may establish
guidelines for vendor vetting, procurement code of conduct, and conflict resolution
procedures.

 Continuous Improvement: Committees often engage in continuous improvement efforts

to enhance the efficiency and effectiveness of the purchasing process. They may conduct
post-purchase evaluations, seek feedback from end-users, monitor vendor performance,
and explore opportunities to streamline processes, negotiate better pricing, or leverage
economies of scale.

Committee work in purchasing helps promote accountability, mitigate risks,

and ensure sound decision-making in the procurement process. It leverages collective expertise
and fosters collaboration among stakeholders to achieve optimal outcomes for the organization.

APPROVAL:

In vardhman there is requirement for approval from the corporate or executive level after a
purchasing committee has made its decision. The committee's role is to evaluate options, assess
proposals, and make recommendations based on their expertise and analysis. However, the final
approval authority typically rests with the higher levels of management or corporate
governance.

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  Oversight and Governance: Corporate approval ensures that purchasing decisions align
with the organization's overall strategic objectives and financial considerations. It
provides an additional layer of oversight to prevent any potential conflicts of interest or
deviations from established policies and guidelines.

 Budgetary Control: Corporate approval helps manage and control the organization's
budget by ensuring that proposed purchases are in line with available resources and
financial constraints. It allows senior management to assess the financial implications
and feasibility of the proposed acquisition before finalizing the decision.

 Risk Management: Corporate approval ensures that potential risks associated with the
purchase are adequately assessed and addressed. It allows senior management to review
and evaluate any legal, compliance, or reputational risks that may arise from the
proposed procurement.

 Decision Consistency: Corporate approval helps maintain consistency in decision-making

across different departments or divisions within the organization. It ensures that
purchasing decisions are aligned with the organization's broader policies, strategies, and
objectives.

Ultimately, the purpose of seeking corporate approval is to ensure that the purchasing
decisions made by the committee are in the best interests of the organization as a whole and
are in line with its overall strategic direction and financial considerations.

GENERATION OF INTERNAL ORDER NUMBER:

Then, the purchase department connect through mail to accounts department for generation of
internal order number.

(A code that represents an organizational unit or program and tracks activity)

 CONCEPT-3

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Fixed Assets
Fixed assets, also known as property, plant, and equipment (PP&E), are long-term tangible
assets that a company or organization acquires for use in its operations and expects to use for
more than one accounting period. These assets are not intended for resale but rather for the
production, provision of services, or administration of the business.

Here are some key points to understand about fixed assets:

Nature and Characteristics:

1. Tangibility: Fixed assets have a physical form and can be seen, touched, and measured.
Examples include land, buildings, machinery, vehicles, and equipment.

2. Long-term Use: They are intended for long-term use, typically beyond one accounting
period, to support the company's operations and generate income.

3. Non-Liquid Nature: Fixed assets are not easily converted into cash without significant
time, effort, or loss of value.

4. Purchase: Fixed assets are acquired through purchase, construction, or self-creation. For
instance, a company may purchase land, buy machinery, or construct a building.

5. Initial Cost: The cost of acquiring a fixed asset includes the purchase price, taxes,
transportation, installation, and any other directly attributable costs. These costs are
capitalized and recorded as the initial cost of the asset.

6. Recognition: Fixed assets are recognized and recorded in the company's books and
financial statements as assets, typically in the "Property, Plant, and Equipment" section
of the balance sheet.

7. Depreciation: Since fixed assets gradually lose their value over time due to wear and
tear, obsolescence, or factors such as technological advancements, they are subject to
depreciation. Depreciation is the systematic allocation of the asset's cost over its
estimated useful life to reflect its gradual consumption.

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 8. Useful Life: Fixed assets are expected to have a useful life, which represents the period
over which the asset is expected to contribute to the company's operations. This
estimation is based on factors like physical wear and tear, technological advancements,
and economic viability.

9. Residual Value: Residual value refers to the estimated value of the fixed asset at the end
of its useful life. It represents the expected net proceeds from disposing of the asset at the
end of its useful life.In vardhamn it is 5%.

AS-10

AS-10, or Accounting Standard 10, is a financial reporting standard issued by the Institute of
Chartered Accountants of India (ICAI). It provides guidelines on accounting for fixed assets
and prescribes the treatment and disclosure requirements related to fixed assets in the financial
statements of an entity.

The objective of AS-10 is to ensure that fixed assets are accounted for in a systematic and
consistent manner, enabling users of financial statements to understand the nature, value, and
changes in an entity's fixed assets over time. It applies to all enterprises, regardless of their size
or nature of business, except for certain specific exemptions mentioned in the standard.

AS-10 outlines the criteria for recognizing fixed assets, including the definition of a fixed
asset, its cost determination, and subsequent measurement. It requires that fixed assets be
initially recorded at cost, which includes all directly attributable costs necessary to bring the
asset into its intended use. Subsequently, the fixed assets are measured at historical cost less
accumulated depreciation and impairment losses.

The standard also provides guidance on the treatment of subsequent expenditures related to
fixed assets, such as additions, improvements, replacements, or major repairs. Such
expenditures can either be capitalized and added to the carrying amount of the asset or
recognized as an expense in the period incurred, depending on whether they meet the criteria
for recognition as an asset.

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AS-10 specifies the depreciation method and rates to be used for allocating the cost of fixed
assets over their estimated useful lives. It requires regular assessment of the useful lives,
residual values, and depreciation methods applied to ensure they are appropriate and reflect the
assets' consumption pattern.

Furthermore, AS-10 sets out disclosure requirements related to fixed assets in the financial
statements. These include information about the carrying amount of each significant category of
fixed assets, accumulated depreciation, impairment losses, revaluation of assets, and any
restrictions on title or use of fixed assets.

Compliance with AS-10 ensures that fixed assets are reported accurately and consistently,
enhancing the reliability and comparability of financial statements for stakeholders, including
investors, creditors, and regulatory authorities.

USEFUL LIFE OF FIXED ASSET (ACCORDING TO VARDHMAN)

NATURE OF ASSET USEFUL LIFE

1. Building
(a) For factory use: 30
(b)Non- factory use 60
2. Plant and machinery 10
3. Land -
4. Office equipment 3-5
5. Vehicles 8
6. Furniture 10

 CONCEPT-4
DEPRECIATION:
Depreciation refers to the gradual decrease in the value of an asset over time. It is a concept
used in accounting to allocate the cost of an asset over its useful life. Assets such as buildings,
vehicles, machinery, and equipment etc. are subject to depreciation.
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Here are some key details about depreciation:

1. Purpose: Depreciation is used to match the cost of an asset with the revenue it generates
over its useful life. Since assets provide benefits over multiple accounting periods, it is
more accurate to spread their cost over the periods they contribute to the generation of
revenue.

2. Factors Affecting Depreciation: Several factors influence the depreciation of an asset.

These include the initial cost of the asset, its estimated useful life, the expected salvage
value (residual value) at the end of its useful life, and the chosen depreciation method.

3. Useful Life: The useful life represents the estimated period during which an asset is
expected to be economically useful to the business. It is determined by factors such as
physical wear and tear, technological obsolescence, legal restrictions, and the nature of
the asset itself. For example, a computer might have a useful life of five years, while a
building might have a useful life of several decades.

4. Residual Value: Residual value, also known as salvage value or scrap value, refers to
the estimated worth of an asset at the end of its useful life. It represents the amount the
business expects to receive by selling or disposing of the asset after it is no longer useful.

5. Recording Depreciation: Depreciation is recorded as an expense on the income

statement and as an accumulated depreciation account on the balance sheet. The
accumulated depreciation account represents the total depreciation charged on an asset
since its acquisition. It is a contra-asset account, reducing the original cost of the asset.

 CAUSES OF CHARGING DEPRECIATION:

Depreciation is the systematic allocation of the cost of an asset over its useful life. It is
primarily charged to reflect the wear and tear, obsolescence, or loss of value of the asset over
time. Here are some common causes of charging depreciation:

1. Wear and Tear: Assets such as machinery, vehicles, and equipment experience physical
deterioration as they are used over time. Factors like friction, usage, and exposure to the
elements can cause their value to decrease.

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2. Technological Obsolescence: With rapid advancements in technology, assets can
become outdated or obsolete. This is particularly relevant for assets like computers,
software, and electronics, which can quickly lose their value as newer and more efficient
models are introduced.

3. Time-based Degradation: Certain assets, such as buildings and infrastructure, may lose
value over time due to factors like aging, weathering, or gradual deterioration of
materials. Even with proper maintenance, their value may decrease over the useful life of
the asset.

4. Market Demand: Changes in market conditions or shifts in consumer preferences can

render certain assets less valuable. For example, fashion trends or evolving customer
preferences can reduce the value of inventory or assets in the fashion industry.

5. Legal or Regulatory Requirements: Some assets may become obsolete or lose value
due to changes in laws, regulations, or industry standards. This can result in the need for
upgrades, modifications, or replacements, leading to depreciation charges.

6. Accrual of Expenses: Depreciation is a way to allocate the cost of an asset over its
useful life, allowing businesses to match the expenses associated with the asset against
the revenue it generates. This practice follows the accrual accounting principle and helps
provide a more accurate representation of the financial performance and position of a
business.

 METHODS OF DEPRECIATION:

1. Straight-Line Method: The most common depreciation method, it allocates an equal

amount of depreciation expense over each period of the asset's useful life. The formula
is: (Cost - Salvage Value) / Useful Life.

2. Declining Balance Method: This method allocates higher depreciation expense in the
early years of the asset's life and gradually reduces it over time. It reflects the assumption
that assets are more productive in their initial years. The most common variation is the
double declining balance method.

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 3. Units-of-Production Method: This method allocates depreciation based on the asset's
usage or production output. The more the asset is used, the higher the depreciation
expense. It is suitable for assets where usage varies significantly.

 METHOD OF DEPRECIATION USED IN VARDHMAN:

Vardhman follows STRAIGHT LINE METHODfor charging depreciation.

More about straight line method:

MEANING: The Straight Line Method (SLM) of Depreciation reduces the value of an asset
consistently till it reaches its scrap value. A fixed amount of depreciation gets deducted from
the value of the asset on an annual basis.

 CALCULATION OF DEPRECIATION:

NOTE: According to vardhman policies of charging depreciation, only 95%of the asset is
capitalised and 5% becomes its residual value.

So, any calculation of depreciation is done on 95% of the asset.

Like: In the above examples,

PRINTER:Life of printer = 3 years

Firstly
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Deduct 5% from capitalised amount = 22000-5% = 20900

Then,

Divide it with the life: 20900/3=6966.667

Now,

Calculate one day depreciation amount: 6966.667/365= 19.08

As the machinery is used for 240 days we have to deduct 125 days depreciation and calculate
final depreciation,

The depreciation for 240 days is 19.08*240= 4580.822.

Same in all cases above, just useful life of the assets may vary.

 CONCEPT-5
CAPITALIZATION:
Capitalization refers to the process of recording expenditure as an asset on the balance sheet
instead of treating it as an immediate expense. It involves recognizing the cost of acquiring or
improving a long-term asset, such as property, plant, and equipment (PP&E), and adding it to
the company's books as a capital asset.

 IMPORTANCE OF CAPITALIZATION:

1. Asset Recognition: Capitalization allows companies to recognize and record long-term

assets on their balance sheets. This provides a more accurate representation of the
company's financial position by including significant assets that contribute to its
operations and value.

2. Matching Principle: Capitalization aligns with the matching principle in accounting.

Instead of recognizing the entire cost of an asset as an expense in the period of
acquisition, capitalization spreads the cost over the asset's useful life. This ensures that
the expenses associated with the asset are matched with the revenue it generates over
time.

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 3. Improved Financial Ratios: Capitalization impacts financial ratios and key performance
indicators. By capitalizing costs, the balance sheet reflects higher asset values, which can
positively impact ratios such as return on assets (ROA), return on investment (ROI), and
debt-to-equity ratio. It provides a more favourable financial picture, especially when
assessing the company's asset base and long-term solvency.

4. Depreciation and Amortization: Capitalization enables the systematic allocation of the

asset's cost over its useful life through depreciation (for tangible assets) or amortization
(for intangible assets). This ensures that the expense associated with the asset is
recognized gradually over time, reflecting its consumption or diminishing value.

5. Asset Valuation: Capitalization helps establish the initial value of an asset. By recording
the cost as the initial asset value, subsequent changes in the asset's value, such as
appreciation or impairment, can be tracked accurately. This is particularly important for
fixed assets, as it allows for proper tracking and evaluation of their financial impact.

6. Decision-Making and Investor Confidence: Proper capitalization provides

transparency and accuracy in financial reporting. It enables stakeholders, including
investors, creditors, and management, to make informed decisions based on reliable
information. Accurate capitalization demonstrates the company's commitment to sound
accounting practices and enhances investor confidence..

 HOW TO CALCULATE THE AMOUNT TO BE CAPITALISED?

To calculate the amount to be capitalized, you typically consider the cost of acquiring or
producing an asset and determining which expenses should be included as part of the asset's
initial value.

Here's a general process for calculating the amount to be capitalized:

1. Acquisition Cost:
Start with the actual cost of acquiring the asset. This includes the purchase price or
construction cost, as well as any additional costs directly attributable to bringing the asset
into its intended use.

Examples of acquisition costs may include purchase price, transportation costs,

installation charges, import duties, and any other directly attributable costs.
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2. Ancillary Costs:
Identify any additional costs that are necessary to make the asset ready for its intended
use. These costs are considered part of the asset's initial value and should be capitalized.

Examples of ancillary costs may include legal fees, professional fees (such as architect or
engineer fees), testing and commissioning expenses, and costs of obtaining permits or
licenses.

3. Improvement Costs:
If significant improvements or enhancements are made to an existing asset, these costs
may also be capitalized. These improvements should increase the asset's future economic
benefits or extend its useful life.

Examples of improvement costs may include major renovations, upgrades, or additions

that substantially enhance the asset's value or performance.

4. Subsequent Expenditures:
After the asset is initially capitalized, any subsequent expenditures that enhance or
extend its useful life should be capitalized as well.

Examples of subsequent expenditures may include major repairs, replacements, or

upgrades that significantly improve the asset's functionality or extend its useful life
beyond its original estimate.

5. Exclude Revenue-Generating Expenses:

Exclude expenses related to day-to-day operations, maintenance, or repairs that are
necessary to keep the asset in its normal operating condition. These expenses are
typically considered as revenue expenditures and are not capitalized.

Examples of revenue expenditures may include routine maintenance, minor repairs, and
consumables necessary for the asset's ongoing operation.

6. Calculate the Capitalized Amount:

Add up the acquisition cost, ancillary costs, improvement costs, and subsequent
expenditures that meet the criteria for capitalization.

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 The total represents the amount to be capitalized, which will be recorded on the balance
sheet as the initial value or cost of the asset.

Hence, the amount to be capitalized is a sum total of invoice and all expenses including GST if
it is not recoverable like in case of new building.

Hence, Invoice + Expenses = Acquisition amount or capitalized value.

 FOR EXAMPLE:

In, case of

Machinery purchased worth Rs.1,00,000 (Invoice Value)

Freight= Rs.5,000

Installation charges= Rs.3,000

CHA(Custom house agent ) charges= Rs.10,000

Then, the acquisition cost will be 1,00,000 + 5,000 + 3,000 + 10,000=1,18,000.

 CONCEPT-6
CAPITAL WORK IN PROGESS:
BEFORE capitalizing, all the expenses related to asset are recorded in Capital work in progress
(CWIP) – It refers to an accounting term that represents the value of long-term assets that are
still under construction or in the process of being prepared for their intended use. It represents
the costs incurred for the acquisition, construction, or development of fixed assets that are not
yet ready for productive use.

 Definition:

Capital work in progress (CWIP) is a balance sheet item that records the costs associated with
the construction, development, or acquisition of long-term assets. These assets include
buildings, infrastructure, machinery, equipment, and other similar items that require a
significant amount of time and resources to complete.

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  Purpose:

CWIP allows businesses to track the costs incurred during the construction phase of a long-term
asset. It provides a more accurate representation of the value of assets that are not yet
completed, allowing for better financial reporting and analysis.

 Inclusions:

CWIP typically includes the direct costs directly attributable to the construction or development
process, such as materials, labor, contractor fees, professional services, and other related
expenses. It may also include indirect costs, such as interest expenses incurred during the
construction period, as long as these costs are directly associated with the asset being
constructed.

 Exclusions:

Certain costs are not included in CWIP. For example, general administrative expenses, research
and development costs, or costs associated with the maintenance or repair of existing assets are
not considered part of CWIP. These expenses are usually recorded as operating expenses when
incurred.

 Recognition:

CWIP is initially recorded as an asset on the balance sheet when the construction or
development activities begin. As the construction progresses and costs are incurred, the CWIP
account is increased by the corresponding amount. Once the construction is completed and the
asset is ready for use, the amount in CWIP is transferred to the appropriate fixed asset account.

 Reporting and disclosure:

Companies are required to disclose the details of their CWIP in their financial statements. This
includes providing information about the nature and purpose of the asset, the expected
completion date, the costs incurred to date, and any significant uncertainties or contingencies
that may impact the finalization of the asset.

 JOURNAL ENTRY IN CAPITAL WORK IN PROGRESS ACCOUNT (CWIP

ACCOUNT)
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In it the CWIP is debited and cash/bank or account payable is credited.When recording capital
work in progress (CWIP) in journal entries, it is important to consider the different costs
associated with the ongoing project or asset under construction. Here are examples of journal
entries for capital work in progress:

1. Direct Material Costs:

Assuming $10,000 of direct material costs incurred for a construction project:

Journal Entry:

[Debit] CWIP - Direct Materials $10,000

[Credit] Accounts Payable $10,000

Explanation:

The direct material costs are debited to CWIP - Direct Materials account to capture the
accumulation of material expenses. The credit entry reflects the liability to suppliers or vendors,
represented by the Accounts Payable account.

2. Direct Labor Costs:

Suppose $5,000 of direct labor costs were incurred for the ongoing project:

Journal Entry:

[Debit] CWIP - Direct Labor $5,000

[Credit] Accrued Payroll $5,000

Explanation:

The direct labor costs are debited to CWIP - Direct Labor account to track the accumulation of
labor expenses. The credit entry represents the liability for the unpaid wages, recorded in the
Accrued Payroll account.

3. Overhead Costs:

Assuming $2,000 of overhead costs associated with the project:

Journal Entry:

[Debit] CWIP - Overhead $2,000

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[Credit] Accounts Payable $2,000

Explanation:

The overhead costs are debited to CWIP - Overhead account to capture the indirect expenses
related to the ongoing project. The credit entry reflects the liability to suppliers or vendors,
represented by the Accounts Payable account.

 WHEN TO CAPITALIZE?

Capitalization of capital work in progress (CWIP) occurs when the project or asset under
construction reaches a certain stage of completion and meets specific criteria for capitalization.

1. Substantial Completion:

CWIP is generally capitalized when the project or asset is substantially complete. Substantial
completion means that the asset is ready for its intended use or is capable of generating future
economic benefits. The exact definition of substantial completion may vary depending on the
nature of the project and applicable accounting standards.

2. Ability to Generate Revenue:

Capitalization usually occurs when the asset is expected to generate revenue or provide
economic benefits to the company. For example, a building project may be capitalized when it
is ready for occupancy or when it can be rented out to tenants.

3. Technical Feasibility:

Capitalization often coincides with the achievement of technical feasibility. This means that the
asset has been developed to a point where it can function as intended and meet the necessary
performance criteria.

4. Cost Threshold:

Companies may set a cost threshold that determines when CWIP should be capitalized. For
example, a company may decide to capitalize CWIP only if the accumulated costs reach a
certain percentage of the total estimated project cost.

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  FOR EXAMPLE:

Like in case of Vardhman,

FOR MACHINES:

When the machine is purchased, it is send to the production department or any other department
in which it is needed and trial period begins, till the production certificate is given by
production department to accounts department and after that the machine is capitalized.

FOR OFFICE EQUIPMENTS:

Office equipment’s are ready to use and there is need to transfer it to CWIP account as to check
on errors like wrong internal order number etc. and after that on same day it is capitalize.

 DETAILS TO MAITAIN WHILE CAPITALIZING IN VARDHMAN?

1. Items
2. Vendor name
3. Bill number
4. Bill date
5. Amount
6. Taxes
7. Capitalized amount
8. Capitalization date
9. Internal order
10.Location
11.Asset id
12.Depreciation amount
13.Working days

 HOW TO CAPITALIZE?

Once the project is completed and ready for use, a portion of the CWIP is capitalized and
transferred to the appropriate fixed asset category. Let's assume $15,000 is capitalized:

Journal Entry:

[Debit] Relevant Fixed Asset Account $15,000

[Credit] CWIP $15,000

Explanation:

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The relevant fixed asset account is debited to record the capitalized value of the completed
project. The credit entry reduces the balance in the CWIP account as the costs are now
transferred to the fixed asset.

IMPORTANT TERMS - GROSS BLOCK AND NET BLOCK:

In capitalization, both net block and gross block refer to the valuation of fixed assets owned by
a company. However, they represent different aspects of the company's fixed assets. Here's a
brief explanation of each term:

(A)Gross Block: The gross block represents the total value of all fixed assets owned by a
company. It includes the original cost of acquisition or construction of the assets, along
with any subsequent capital expenditures incurred to improve or enhance those assets.
The gross block includes tangible assets such as land, buildings, machinery, equipment,
vehicles, and intangible assets like patents, trademarks, and copyrights.
GROSS BLOCK = ACQUISITION COST

(B)Net Block: The net block refers to the value of fixed assets after accounting for
depreciation. Depreciation is the systematic allocation of the cost of an asset over its
useful life. As assets age or become obsolete, their value decreases due to wear and tear,
technological advancements, or changes in market conditions. To reflect this decrease in
value,companies record depreciation expenses, reducing the value of the assets over
time. The net block is calculated by subtracting the accumulated depreciation from the
gross block.
NET BLOCK= GROSS BLOCK - DEPRECIATION

 CONCEPT-7
CAPITALIZATION IN CASE OF TRANSFER OF ASSETS:

To capitalize a transfer asset means to record it as a capitalized asset on your company's

balance sheet. Capitalized assets are long-term assets that provide economic benefits over a
period longer than one year. Here are the general steps to capitalize a transfer asset:

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1. Determine the eligibility: Assess whether the transferred asset meets the criteria for
capitalization. Typically, transfer assets that qualify for capitalization are tangible assets
(e.g., equipment, property) or intangible assets (e.g., patents, copyrights) that have a
useful life beyond one year.

2. Gather documentation: Collect all relevant documentation related to the transfer asset,
including purchase invoices, transfer agreements, and any supporting documents that
establish ownership and value.

3. Record the asset: Create an entry in your accounting system to record the transfer asset.
Depending on accounting software, this may involve creating a new asset account or
selecting an appropriate existing account.

4. Determine the asset's value: Determine the fair value or cost basis of the transfer asset.
Fair value is the market value of the asset, while cost basis refers to the original cost of
acquiring the asset. If you're unsure about the value, consult with a qualified appraiser or
accountant.

5. Calculate depreciation: Determine the depreciation method and useful life for the
transfer asset. Depreciation is the process of allocating the asset's cost over its useful life.
Common depreciation methods include straight-line, declining balance, and units of
production. Consult with your accounting team to determine the appropriate method.

6. Depreciate the asset: Record the depreciation expense for the transfer asset in your
accounting system. Depreciation should be recorded regularly (e.g., monthly, annually)
following the chosen depreciation method.

7. Maintain supporting records: Keep all relevant documentation, such as invoices,

receipts, and depreciation schedules, to support the capitalization of the transfer asset.
These records will be useful for audits, financial reporting, and future asset management

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 CONCEPT-8
SALE OF ASSET:
In vardhman the sale of asset is done when the asset becomes fully obsolete or the life of
asset expires and the sale of asset is done through auctions i.e. through biding.

 If the asset is sold more than the net block amount then, there is profit in the fixed assets.
 If the asset is sold less than the net block amount then, there is loss in the fixed assets.

JOURNAL ENTRY MADE TO RECORD SALE OF ASSETS:

o CUSTOMER ACCOUNT DR.

SGST PAYABLE ACCOUNT CR.

CGST PAYABLE ACCOUNT CR.

CONTRA ACCOUNT CR.

o ACCUMULATED DEPRECIATION ACCOUNT DR.

CONTRA ACCOUNT DR.

FIXED ASSETS ACCOUNT CR.

GAIN FROM SALES CR.

Note:

{ACCUMULATED DEPRECIATION ACCOUNT- Total amount of depreciation expenditure

allocated to a particular asset since the asset was used.}

 RECOMMENDATIONS:

1. Establish clear capitalization policies: Create and communicate clear guidelines and
policies regarding the capitalization of fixed assets within your organization. This helps
ensure consistency and eliminates confusion among employees regarding which assets
should be capitalized.
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 2. Provide training and guidance: Offer training sessions or resources to educate
employees involved in the capitalization process. Ensure they understand the
capitalization policies, the criteria for qualifying assets, and the proper procedures for
recording and depreciating assets.

3. Implement effective asset tracking systems: Implement a reliable asset tracking system
that enables accurate and efficient recording of asset details, such as acquisition date,
cost, useful life, and depreciation method. This helps streamline the capitalization
process and provides a centralized database for asset management.

4. Conduct regular asset audits: Periodically conduct asset audits to verify the accuracy
of capitalization records and identify any discrepancies or missing assets. This helps
maintain the integrity of the asset records and ensures compliance with accounting
standards.

5. Seek professional advice: If you encounter complex or unique situations related to

capitalization, consider consulting with a professional accountant or financial advisor
who specializes in fixed asset management. They can provide guidance tailored to your
specific circumstances and help resolve any challenges or issues that arise.

6. Stay updated with accounting standards: Keep up to date with the latest changes in
accounting standards, such as Generally Accepted Accounting Principles (GAAP) or
International Financial Reporting Standards (IFRS), to ensure compliance with relevant
regulations and best practices in capitalization.

7. Regularly review and adjust policies: Review your capitalization policies periodically
to ensure they remain aligned with industry standards and the evolving needs of your
organization. Adjustments may be necessary as your business grows, new assets are
acquired, or accounting regulations change.

By implementing these strategies, you can mitigate problems and ensure accurate and
consistent capitalization of fixed assets, leading to improved financial reporting and asset
management within your organization.
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  CONCLUSION:
In conclusion, the fixed assets capitalization process is a critical component of financial
accounting and management. It involves recognizing and recording the acquisition or
construction costs of tangible assets that provide long-term benefits to an organization. By
capitalizing fixed assets, businesses can accurately report their investments and ensure proper
allocation of costs over the asset's useful life.

The capitalization process typically involves determining the appropriate threshold for
capitalization, identifying qualifying assets, tracking their costs, and allocating expenses such
as depreciation and interest. It helps organizations maintain accurate financial statements,
comply with accounting standards, and make informed decisions regarding asset management,
budgeting, and investment planning.

Capitalizing fixed assets provides several benefits, including improved transparency and
accountability in financial reporting, better tracking of asset values, enhanced comparability of
financial statements, and a clearer understanding of the organization's overall financial health. It
also allows businesses to assess the return on investment and evaluate the efficiency of their
asset utilization.

However, it is essential to adhere to relevant accounting standards and regulatory guidelines

while conducting the fixed assets capitalization process. This ensures consistency and reliability
in financial reporting, reducing the risk of misstatements or non-compliance.

Overall, the fixed assets capitalization process is crucial for organizations seeking to maintain
accurate and transparent financial records, effectively manage their assets, and make informed
business decisions. It contributes to sound financial management practices and supports long-
term sustainability and growth.

 REFERNCES:
1. https://corporatefinanceinstitute.com/resources/accounting/fixed-
assets/
2. https://www.investopedia.com/
3. https://www.accountingtools.com/
4. https://www.mca.gov.in/

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