Plant fund accounting is primarily concern to the accounting of capital assets and the related activity during the asset’s life cycle as well as major construction and renovation. Capital assets refers to long-lived assets that can provide service for several future years. Plant assets are stated at actual or estimated cost at date of acquisition. Construction is capitalized as expended and reflected in net investment in plant.
When construction is not yet complete, buildings and other construction are first accounted for as construction in progress at fiscal year-end. When the construction has been certified as substantially complete, the construction is removed from construction in progress and accounted for as investment in plant. In case the funds came from local borrowings, borrowed funds should be properly accounted to facilitate the year-end preparation of balance sheet. Expenditures should be recorded and capitalized in the same manner as other plant expenditures.
At year end, the amount of expenditures financed from borrowed funds must be reflected as a liability on the investment in plant balance sheet. Borrowings unexpended at year-end must be reflected as a liability on the unexpended plant balance sheet. Expenditures exceeding the amount borrowed must show a corresponding amount as a liability on investment in plant to indicate a temporary loan from unexpended plant. Below are the accounting entries used throughout the life of a project funded with local borrowings.
Plant reserve fund is an appropriation of retained earnings so it must be properly presented in the equity section of the balance sheet. Instead of continuing to report undistributed profits in retained earnings, which may be interpreted by stockholders as amounts available for dividends, the university may authorize transfers from retained earnings to a special account that describes the utilization of earnings.