Accounting Treatment for Spare Parts Purchase for Machinary

Accounting Treatment for Spare Parts Purchase:

Table of Contents:

1. Introduction

2. Types of Spare Parts in Accounting

3. Necessary Leader Creation

4. Creation PAD (Payment against Document)

5. Charged LC Margin Deposit

6. Creation of LTR against Spare Parts

7. PAD Adjustment with Margin Deposit

8. Adjust LTR Ledger Balances

9. Interest Calculation for (LTR)

10. Partial Adjustment LTR Payment

11. Adjust Transit S/P LC-2967-11950

12. Finally, Purchase Journal Entry Passed

13. Practical Real-Life Examples

14. Common Mistakes to Avoid

15. Conclusion

16. FAQ

1. Introduction

The accounting treatment of spare parts is an important aspect of financial reporting, particularly for businesses that rely heavily on machinery and equipment. Determining whether spare parts should be capitalized as assets or expensed in the income statement depends on their nature, expected usage period, and the applicable accounting standards.

Hello, I am Md. Harun Or Rashid, a content creator and your learning partner in accounting and finance.

In this guide, you will learn the correct accounting treatment for spare parts purchased for machinery through an Import Letter of Credit (LC). The discussion includes practical examples, journal entries, and real corporate practices to help you clearly understand the process.

In corporate practice in Bangladesh, companies that operate heavy machinery often need to purchase spare parts regularly to ensure smooth production operations. This is especially common in large manufacturing industries, such as Rotor and Rotor Spinning Mills Limited, as well as other textile manufacturing companies.

In most cases, these companies import spare parts from foreign suppliers through Import Letters of Credit (LC). The process typically begins with the commercial department preparing the necessary documents for the purchase. After receiving approval from higher management, the company submits the documents to the bank to open an Import Letter of Credit.

After receiving the documents, the negotiating bank verifies the information and accepts the documents on behalf of the importer. Once verification is completed, the bank formally opens the Import Letter of Credit (LC) in favor of the supplier. The bank then completes the remaining procedures systematically to finalize the import transaction.

In the following sections, I will briefly explain this process to build a clear understanding of the accounting treatment for spare parts purchases.

For accountants, determining the correct accounting entries in such situations can sometimes be challenging. However, there is no need to worry. In this article, I will go through the entire process step by step so that you can easily understand the proper accounting treatment.

2.Types of Spare Parts in Accounting

Generally, in the textile manufacturing sector, including companies like Rotor & Spinning Mills Limited, spare parts can be categorized into three main types for accounting purposes.

1. Consumable Spare Parts:

Consumable spare parts usually include:

• Low-cost items
• Items used immediately in operations
• Recorded as expenses in the income statement

Examples include lubricating oil, filters, belts, and small mechanical components that are frequently replaced during routine maintenance.

2. Capital Spare Parts (Major Spare Parts):

Capital spare parts generally include:

• High-value items
• Used for more than one accounting period
• Capitalized as fixed assets

These parts are significant components of machinery and are recorded as Property, Plant, and Equipment (PPE) in accordance with IAS 16 or applicable accounting standards.

3. Standby Spare Parts:

Standby spare parts are:

• Used only during emergency situations
• Critical for machinery operations
• Often capitalized as assets if they are expected to be used over multiple periods

These spare parts are kept available to avoid production interruptions when critical machinery components fail.

3. Necessary Ledger Creation:

For proper accounting treatment of imported spare parts, accountants must first create the necessary ledger accounts in the ERP or accounting system.

The following ledgers are commonly required:

1. PAD (Payment Against Documents):

• Ledger Group: Current Liabilities
• Example Ledger:
• PAD SJIBL-40850
• LC-10500 (if applicable)

This account records the bank liability created when the bank pays the supplier against import documents.

2. LATR / LTR (Loan Against Trust Receipt):

• Ledger Group: Current Liabilities
• Example Ledger:
• LTR-323-46700
• S/P-LC-10500 SJIBL (if applicable)

This ledger records the loan facility provided by the bank to release imported goods before payment is fully settled.

3. LC Margin Deposit (MD):

• Ledger Group: Current Assets
• Example Ledger:
• LC 296722010500 MD

This account records the margin amount deposited with the bank while opening the Letter of Credit.

4. Spare Parts in Transit (Transit Spare Parts):

• Ledger Group: Current Assets
• Example Ledger:
• Transit S/P LC-296722010500

This ledger records imported spare parts that are still in transit and have not yet reached the company warehouse.

5. Inventory Ledger (Spare Parts)

• Ledger Group: Current Assets – Inventory
• Example Ledger:
• 1704649 – Brake Lever BD-54302278

Once the spare parts are received in the warehouse, the value is transferred from transit inventory to the spare parts inventory account.

Accounting Treatment for Spare Parts Purchase through LC

Let us now understand the accounting treatment step by step based on the import process described above.

4. Creation of PAD (Payment Against Documents)

At the first stage, the bank confirms payment to the exporter by creating a PAD (Payment Against Documents) account in favor of the importer.
This occurs when the bank receives and accepts the import documents submitted by the negotiating bank.

Journal Entry

Ledger Name	Debit(Tk.)	Credit(Tk.)	Remarks
Transit –S/P LC-2250100	*****		Being spare parts recorded as goods in transit
PAD-325-0004600, SP-LC-11950		*****	Liability created to bank

Narration:

PAD created against Spare Parts LC No. 2967-11950, amount $20,000 @ Tk.148 = Tk. 29,60,000 dated 20.02.2026.

5 LC Margin Deposit (Security Deposit – 5% of LC Value)

Secondly, the bank deducts a margin deposit (MD) from the importer’s bank account as security for opening the Letter of Credit.
Usually, companies deposit 5%–20% of the LC value, depending on bank policy.

Bank Payment Voucher (BV)

Ledger Name	Debit(Tk.)	Credit(Tk.)	Remarks
LC-2967-11950MD	*****		Margin deposit recorded
Shahjalal Islami Bank Ltd. CD-2832		*****	Bank account credited

Narration:

LC margin deposited against Spare Parts LC No. 2967-11950 dated 28.12.2025.

6: Creation of LTR (Loan Against Trust Receipt)

Thirdly, the bank may approve an LTR (Loan Against Trust Receipt) facility for the importer.
This allows the company to release imported spare parts without making immediate payment, and the bank provides a short-term loan.

The bank credits the company’s current account with the loan amount.

Bank Received Voucher (RV):

Ledger Name	Debit(Tk.)	Credit(Tk.)	Remarks
Shah Jalal Islamic Bank Ltd. CD-2832	*****		Loan received
LTR-5478-5860, S/P-LC-2967-11950 SJIBL		*****	Liability create

Narration:

LTR created against Spare Parts LC No. 2967-11950, amount EUR 28,000 @ Tk.147.50 = Tk. 41,30,000 dated 10.02.2026.

7 PAD Adjustment with LC Margin Deposit

Fourthly, the PAD liability is partially adjusted with the LC margin deposit, which was previously deposited with the bank as security.

Journal Entry

Ledger Name	Debit(Tk.)	Credit(Tk.)	Remarks
PAD-325-0004600, SP-LC-11950	*****
LC-2967-11950MD		*****

Narration:

LC Margin adjusted against PAD-325-0004600, S/P LC-11950 for Spare Parts LC-2967-11950 (SJIBL) dated 15.01.2026.

8. Transit Spare Parts Ledger (Store in Transit)

To determine the total landing cost of spare parts, accountants usually create a ledger named “Transit Spare Parts (Store in Transit)”.

All related import expenses such as:

• LC charges
• Bank commission
• Confirmation charges
• VAT
• Insurance premium
• Lodgment charges
• C&F expenses
• Freight and handling

are recorded in this ledger until the spare parts arrive at the warehouse.

Ledger: Transit Spare Parts (Store in Transit)

Ledger Name: Transit S/P LC-296722010500

Voucher date	Particulars	Debit(Tk.)	Credit(TK.)	Balances
29.09.2024	LC charged & Commission	8,000		8,000
19.10.2024	Add confirmation Charge & VAT against	6,000		14,000
23.10.2024	Insurance Premium	1,200		15,200
07.12.2024	Lodgment charge	9,500		24,700
15.12.2024	PAD-325-00040944,SP-LC-10879 SJIBL	24,00,000		24,24,700
20.12.2024	C & F Bill	3,35,000		27,59,700
24.012025	Spare parts-1703628-Cover-EL-23622 54301802		27,59,700	00000
	Total	27,59,700	27,59,700	00000

Once the spare parts are received in the warehouse, the total accumulated cost in the transit ledger is transferred to the Spare Parts Inventory account.