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BAD DEBT WRITTEN OFF

Bad debt:-

The amount which is not recoverable from debtors is called as Bad debt. It is also termed as Uncollectible amount. Bad debt is total loss to the firm, and it records in debit side of income statement.

Methods of Accounting treatment for Bad debts:-

Accounting for bad debts is two methods, such as:-

1. Allowances method:-

In this method, first, we need to estimate the uncollectible (doubtful debt) receivables. This estimation procedure will depend on the respective company. For example, some companies consider on percentage of sales, some companies consider on percentage of receivables, etc. Then, Bad debts expense is recognized before the debt actually become un-collectible. The adjusting entry at the end of an accounting period to recognize estimated bad debts expense. Thus, a provision account called as “Allowances for doubtful account” is created. The below adjusting entry which is having hypothetical values as under is for example.

Dr. Bad debts expense A/c (Expenses – P/L) 20,000

Cr. Allowance for doubtful debt (Receivables – Asset) 20,000

The Allowance for doubtful debt is a contra asset A/c which will be display on balance sheet by subtracting it from Accounts receivable (debtors). For example, the debtors value was 1,50,000 before passing the above entry, then Debtors balance will be show as Rs1,30,000 after recorded the above entry. In the next period, when a debt is actually determined as uncollectible for 5,000, the below written off journal entry has to record.

Dr. Allowance for doubtful debt (Receivables – Asset) 5,000

Cr. Debtor A/c (Accounts receivable – asset) 5,000

As more and more debts are written off, the balance in the “Allowance for doubtful debt” will decrease.

If any bad debt is recovered, then, two journal entries should pass as below.

(a) Reverse the write off entry as (assume for Rs 3,000) :-

Dr. Debtor A/c (Accounts receivable – asset) 3,000

Cr. Allowance for doubtful debt (Receivables – Asset) 3,000

(b) record the receipt entry as below:-

Dr. Cash / bank A/c (asset) 3,000

Cr. Debtor A/c (Accounts receivable – asset) 3,000

2. Direct written off method :-

In this method, we can directly written off bad debts, and no involvement of contra-asset A/c i.e. “Allowance for doubtful debt”.

Bottom line :-

We can use Direct written off method for small amounts, whereas Allowances method for huge amounts.

Thank you,

Chandra Sekhar Reddy

LETTER OF CREDIT

Definition of Letter of credit:-

A written document issued by the bank on request of its customer, promising to pay specified sum in a specified currency by a buyer’s (or importer’s) bank i.e. issuing bank to the seller’s (beneficiary or exporter’s) bank i.e. accepting bank or negotiating bank or paying bank for providing of goods and services. The banks collect a fee for issuing a Letter of credit. The “Letter of credit” is also termed as “Credit letter” or “Documentary credit” which contains the below supporting documents:-

(a) Commercial invoice (Proof of value of goods and services),

(b) Bill of Entry / Bill of lading (Proof of shipment),

(d) Certificate of Origin,

(e) Packing list,

(f) Insurance certificate,

(g) Inspection certificate as proof of quality,

(h) Draft or Bill of exchange which Is negotiable instrument to be given to the bank in order to get paid.

Parties involved in Letter of credit:-

(a) Buyer or Importer or applicant,

(b) Issuing Bank,

(d) Confirming bank or Seller’s bank or Negotiating bank or Advising bank.

Accounting procedure:-

(a) Buyer and seller agree the contract with payment guaranteed by ‘Letter of credit (LC)’ ,

(b) Buyer’s bank issues Letter of credit LC to seller or beneficiary,

(d) Seller sends shipping documents to seller’s bank,

(e) Seller’s bank sends the shipping documents to buyer’s bank,

(f) Buyer’s bank sends payment to seller’s bank,

(g) Buyer’s bank sends shipping documents to buyer in return for payment,

(h) Buyer uses shipping documents to get goods from carrier,

(i) Buyer will make payment to Buyer’s bank.

Types of Letter of credit:-

1. Commercial LC :-

The seller of goods may face difficulty to judge credibility because the seller don’t know about foreign buyer. Hence, for the security of money purpose, seller can accept for providing the goods to buyer by using Letter of credit. This type of LC is known as Commercial or Standard LC.

2. Standby LC :-

An LC that gives guarantee by the issuing bank for the payment in case payment not done by the buyer of goods is known as Stand by LC. It is similar to Bank guarantee which does not enable transaction, but guarantees the payment.

3. Confirmed LC :-

The seller (or exporter) of goods may acquire the guarantee for payment from a confirming bank (or second bank, or seller’s bank) to avoid the risk of non-payment from the issue bank (or first bank, or buyer’s bank). This type of LC is called as Confirmed LC.

4. Transferable LC:-

The beneficiary (seller) having the right to further transfer of payment which is entire or a part of payment to another beneficiary in case of intermediary between the actual supplier/seller of goods and the buyer. For example, the intermediate beneficiary sends only documents whereas actual supplier sends goods to the buyer.

5. Revocable LC:-

An issue bank having the facility to adjust the terms and conditions of LC or cancel the LC completely without giving prior notice to the beneficiary. This kind of LC is called as Revocable LC. The reasons for revoke the LC are Declined market conditions, Political tension, Insufficient funds, etc. If applicant of LC gives personal guarantee or mortgage to obtain LC, it is called as secured Revocable LC. If the issue bank issues LC solely by looking at applicant’s history and credit score, etc. is known as un-secured revocable LC.

6. Revolving LC :-

An LC which allows to issue for covering multiple transactions in place of issuing separate LC for each transaction is known as Revolving LC.

7. Red clause LC :-

An LC which allows an advance payment to the beneficiary (or seller / exporter) on written confirmation, before the goods are shipped or services performed to the buyer, for the purpose of working capital to purchase raw material, processing, and packaging of goods, etc. is called as red clause LC.

8. Green clause LC :-

An LC which allows a payment is granted to the beneficiary (or seller / exporter) on written undertaking receipts and additional advances for pre-shipment warehousing at port of origin, and insurance expenses apart from covered in red clause, etc. only after the purchased goods are stored in bonded warehouses, is known as Green clause LC.

9. Deferred payment LC :-

The Letter of credit which allows the payment after a certain period of goods are shipped to the buyer. The buyer’s bank may review the documents early, but the payment to the beneficiary (or exporter/seller) will be made after the agreed time passes is termed as Deferred payment LC.

Advantages of LC :-

(a) Works as a credit certificate to buyer,

(b) Risk free credit to seller,

(d) Global business expansion as safe,

(e) Guaranteed payment in disputable transactions,

(f) Pre-shipment fund available to exporter of goods,

(g) Timely payment leads to better cash flow planning for seller of the goods and services.

(h) Less production risk, if the buyer cancels or changes the order

Disadvantages of LC :-

(a) Bank fee is an additional cost to the buyer,

(b) Time consuming process (or formalities),

(d) Default risk by issuing bank,

Difference between Letter of credit and Bank guarantee:-

Letter of credit:-

(a) It is a financial document for enable payments to seller on behalf of the buyer against the stated documents provided by seller.

(b) Less risk for buyer (or merchant), and more risk for the buyer’s bank,

(d) Buyer’s bank can make Payment only when condition specified is fulfilled,

(e ) It is suitable for import and export business.

Bank guarantee:-

(a) The guarantee given by the bank to the beneficiary on behalf of the applicant when the applicant fails to make payment to the beneficiary.

(b) Less risk for the applicant’s bank, and more risk for the buyer (or merchant),

(d) Buyer’s bank can make Payment only when applicant fails to make payment to the beneficiary,

(e ) It is suitable for government contracts.

Example of Letter of credit transaction :-

‘Tata motors’ company wants to buy 1000 tyres from ‘MRF’ limited, which costs of Rs50,00,000 but Tata motors having bank balance of Rs20,00,000 at present. Tata motors ask MRF for credit period of 60 days to pay balance payment, but MRF is in doubt whether Tata motors will be able to pay the balance payment or not. At the same time MRF is not ready to leave the customer. Thus, MRF limited asks Tata motors to produce Letter of credit to receive the material. Therefore, Tata motors consults SBI to make the total payment of Rs50,00,000 to MRF through LC, SBI accepts the letter of credit on payment of LC commission @ 25%. Then, Tata motors make payment of Rs12,50,000 as 25% LC commission to SBI, and SBI make the required payment of Rs50,00,000 to MRF. Then, MRF limited sent 1000 tyres to Tata motors. Finally, Tata motors received the tyres, and balance payment of Rs37,50,000 will be made to SBI within the said due date by SBI.

Accounting treatment in the books of accounts of buyer for purchasing of goods through Letter of Credit :-

Name of the Account	Head	Dr/Cr
Vendor A/c	Current liability	Dr
LC margin / Acceptance A/c	Current liability	Cr
(LC accepted by the bank to receive the goods from vendor)
LC payable / Acceptance A/c	Current liability	Dr
Bank A/c	Current Asset	Cr
(LC Margin amount paid to the bank)
Stock-in-transit A/c	Current Asset	Dr
Vendor A/c	Current liability	Cr
(Stock sent by vendor to buyer)
Stock A/c	Current Asset	Dr
Stock-in-transit A/c	Current Asset	Cr
(Stock received by buyer)
LC margin / Acceptance A/c	Current liability	Dr
Bank A/c	Current Asset	Cr
(Balance payment of LC Margin paid to the bank)
LC charges/commission A/c	Expense	Dr
Bank A/c	Current Asset	Cr
(LC commission charged by bank)

Thank you,

Chandra Sekhar Reddy

Friday, 24 April 2020

BALANCE SHEET and STATEMENT OF PROFIT & LOSS (schedule III u/s 129 of Companies Act, 2013)

BALANCE SHEET and STATEMENT OF PROFIT & LOSS

(schedule III u/s 129 of Companies Act, 2013)

Balance sheet and Statement of Profit and loss Account of a company as per schedule III u/s 129 of Companies Act, 2013 as mentioned below :-

PART – I

BALANCE SHEET

Name of the company _________________________________

Balance sheet as at __________________

Particulars	Note No.	Figures as at the end of current reporting period	Figures as at the end of previous reporting period
I EQUITY AND LIABILITIES
(1) Shareholder's funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-current liabilities
(a) Long term borrowings
(b) Deferred tax liabilities (net)
(c) Other long term liabilities
(d) Long term provisions
(4) Current liabilities
(a) Short term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short term provisions
TOTAL LIABILITIES

II ASSETS
(1) NON CURRENT ASSETS
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c ) Deferred tax asset (net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c ) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances
(f) Other current assets
TOTAL ASSETS

PART – II

STATEMENT OF PROFIT AND LOSS

Name of the company _________________________________

Statement of Profit and Loss for the FY ended __________________

*S.No*	*Particulars*	Note No.	Figures as at the end of current reporting period	Figures as at the end of previous reporting period
I	Revenue from operations
II	Other income
III	Total Income (I + II)
IV	Expenses
	(a) Cost of materials consumed
	(b) Purchase of stock-in-trade
	(c) Changes in inventories of finished goods work-in-progress and stock-in-trade
	(d) Employee benefits expenses
	(e) Finance cost
	(f) Depreciation and Amortization expenses
	(g) Other expenses
V	Profit / loss before exceptional and extraordinary items and tax (III - IV)
VI	Exceptional items
VII	Profit / loss before extraordinary items and tax (V - VI)
VIII	Extraordinary items
IX	Profit / loss before tax (VII - VIII)
X	Tax expense
	(a) Current Tax
	(b) Deferred Tax
XI	Profit / loss after tax for the period from continuing operations (IX - X)
XII	Profit / loss from discontinued operations before tax
XIII	Tax expense of discontinued operations
XIV	Profit / loss from discontinued operations after tax (XII - XIII)
XV	Profit / loss for the period (XII + XIV)
XVI	Earnings per equity share
	(a) Basic
	(b) Diluted

Thank you,

Chandra Sekhar Reddy