Accounting Treatment Of Corporate Social Responsibility

Kopal Jain | Updated: 28 February, 2022

“Creating a strong business and building a better world are not conflicting goals, they are both essential ingredients for long term success”
-Bill Ford

MEANING OF CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) broadly refers to the work and activities undertaken by corporates towards issues related to social causes and development, environment, disaster relief and community support.

APPLICABILITY OF CORPORATE SOCIAL RESPONSIBILITY

If any entity fulfils any of the mentioned criteria during the immediate preceding financial year then it has to apply CSR rules in current financial year.

If CSR is applicable on any company due to above mentioned criteria then it has to consider the following three special points:

The entity will spend on CSR activities which are prescribed under Schedule VII of Companies Act 2013.
Company have to spend under CSR activities for consecutive 3 years after satisfying one of above criteria. It means you have to check the criteria at the end of 3^rd year for compliance with CSR for next

The entity has to spend at least 2% of its average profit of 3 immediate preceding years

How is Net Worth calculated?

Net Worth		Paid up Capital
	+	All reserves which are created out of profits e.g General reserve, CRR, Profit and Loss
	+	Securities Premium
	–	Accumulated Losses
	–	Deferred Revenue Expenditure
	–	Miscellaneous Expenditure

ACCOUNTING FOR CSR EXPENSE

The following entry should be recorded for accounting of CSR expense:

CSR Expense A/c Dr.
To Bank A/c
Profit and Loss A/c A/c Dr.
To CSR Expense A/c

ACCOUNTING FOR CSR ASSETS

If CSR expenditure is incurred on construction or acquisition of CSR assets then the following 2 cases can be considered.

CASE I- If Control over CSR asset is not with the entity We will treat amount paid for CSR asset as CSR expense and it will be debited in profit and loss account. There will be same accounting treatment of CSR asset as of CSR expense.

CASE II- If Control over the asset is still with the company In this case, we will treat it as an asset and it will be disclosed in Balance sheet. Accounting treatment in this case will be :

CSR Asset A/c Dr.
To Bank A/c
Depreciation A/c Dr.
To CSR Asset A/c
CSR Expense A/c Dr.
To Depreciation A/c
Profit and Loss A/c Dr.
To CSR Expense A/c

ACCOUNTING TREATMENT OF INCOME GENERATED FROM CSR

If any nominal income is generated from CSR activities then the treatment of such income will be:

Bank A/c Dr.
To CSR Income A/c
CSR Income A/c Dr.
To Profit and Loss A/c
CSR Expense A/c Dr.
To CSR Liability A/c
Profit and Loss A/c Dr.
To CSR Expense A/c

CSR Income will be credited to the profit and loss statement but an equal amount will also be debited in the profit and loss statement as CSR expense to contra the effect on profit and loss.

SOME IMPORTANT POINTS TO BE CONSIDERED

If any entity wants to claim CSR expense then it should be spent in India. If any expense is incurred outside India on social activities then such an expense will not be claimed as an CSR expense.
If any CSR policy is formed for the benefit of employees of companies or for their families then it will not be treated as an CSR expense.
If contributions have been made to political parties then it will not be treated as an CSR expense.
If any social activity is carried which is not mentioned in schedule VII then it will be considered as Voluntary expense instead of CSR expense.
Earlier carry froward of CSR expense was not allowed but now expenditure in excess of 2% is allowed to carry forward in the next financial year.