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Excise Duty in Inventory Valuation
« on: December 08, 2013, 08:51:53 AM »
Excise Duty in Inventory Valuation:

According to Accounting Standard 2 on Inventory Valuation, Inventory is classified as following:

  • held for the sale in the ordinary course of business that is Finished Goods
  • in the process of production of such sale that is Work in progress
  • in the form of materials or supplies to be consumed in the production process or in the rendering of services that is Raw materials, consumables,components etc
Now question may arise how excise duty is accounted in Inventory Valuation??

  • Raw Materials is recognized at a 'net of excise duty' that is if  5000 kg raw materials is purchased at a Rs 52/- (including Rs 2 as excise duty) then entry would be like this:

     
    Purchase a/c                                Dr.          250000   
    Cenvat Credit Receivable a/c       Dr.          10000
              To bank/Suppliers a/c        Cr.                260000
Why raw materials is net of excise duty?

Raw material is recorded at a net of excise duty because input tax paid by the manufacturer will be paid back to the manufacturer in the form of Cenvat Credit.


Similarly, work in progress would be recorded at a net of excise duty. Work in progress valuation would be based on stage of completion including raw materials at a net of duties.
  • Further, Finished Goods would be valued at a price including excise duty. This is because of the following reason:

  • Excise duty is paid on the clearance of goods from the factory, so will you include the excise duty wihile valuing the Closing stock of finished goods store in a warehouse?
  • If Finished Goods is store in warehouse then why should we consider the excise duty, excise duty is paid at the time of clearance. So no, excise duty is not considered?
    • If this would be the answer then 'YOUR ANSWER IS WRONG.'

  • Excise duty is levied at the time of manufacturing of goods, so as soon as goods are manufactured the excise duty is levied on the goods, but it is collected at the time of clearance of the goods from the factory.
  • So, once the goods is manufactured, manufacturer will become liable to pay excise duty on it. The clearance of goods is only time collect the duty.
  • Thus excise duty liability get arise at the time of manufacturing and thus it is necessary to make a provision for the excise duty on the unsold Finished Goods.
  • This is the reason why closing stock of finished goods would be valued at excise duty cum price.
To Sum Up:
  • Raw materials and Work in progress is recognized at a net of duty price.This is because the excise duty paid on the Raw materials will be paid back in the form of cenvat credit
  • Finished goods would be valued at a excise duty cum price that is including excise duty.This is because excise duty is charged on the manufacturing and as soon as goods are manufactured the excise duty is liability is created.
« Last Edit: December 08, 2013, 08:59:10 AM by TechShristi »

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Excise Duty in Inventory Valuation
« on: December 08, 2013, 08:51:53 AM »

 
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