Profit and Loss Suspense Account An entity prepares a profit and loss suspense account when either the partner is retired or in case of the death of a partner at any time before the end of the reporting period. It is used to record some fictitious profits during the year. Why do we Prepare the ProfiRead more
Profit and Loss Suspense Account
An entity prepares a profit and loss suspense account when either the partner is retired or in case of the death of a partner at any time before the end of the reporting period. It is used to record some fictitious profits during the year.
Why do we Prepare the Profit and Loss Suspense Account
Generally, an organization prepares its financial statements at the end of its reporting period. The financial statements of typically a partnership firm include –
- Trading and Profit and Loss Account or
- Income and Expenditure account
- Balance Sheet.
As stated above since these financial statements are prepared at the end of an accounting period. The partner may die or decide to retire on any given date. In case if the partner retires or dies in the middle of the year or on any given date then it shall be a tedious task for an entity to distribute the profits.
Hence to eliminate the hardships, the “Profit and Loss Suspense Account” is created and the share of profit of such deceased or the retired partner is calculated through Profit and Loss Suspense Account.
For Example,
Mr Alex, Ms Anna and Mr John are in partnership sharing profits and losses in the ratio of 2:2:1. Mr Alex died on 15th April, XXXX. The firm closes its books of account on 31st December every year. So the executor of Mr Alex is entitled to 3 and 1/2 months profit. Ms Anna and Mr John decided to pay the profit immediately to the executor of Mr Alex. The profit of the previous accounting period was 1,20,000.
Here, The proportionate profit for 3 and 1/2 months
= 1,20,000 x 3.5months/12months
= 35,000
Mr Alex’s share of profit
= 35,000 x 2/5 (his share in the partnership)
= 14,000 (for 3 and 1/2 months)
The above calculation shall be journalised as –
Extract of Balance Sheet as on 15th April XXXX:
Aastha.
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Debenture Suspense Account It's basically a temporary account prepared by an entity to record the transaction of debenture when such an entity issues or agrees to issue a certain amount worth debentures as collateral security. As soon as the entity repays the loan taken it shall nullify the earlierRead more
Debenture Suspense Account
It’s basically a temporary account prepared by an entity to record the transaction of debenture when such an entity issues or agrees to issue a certain amount worth debentures as collateral security. As soon as the entity repays the loan taken it shall nullify the earlier agreement in simple terms pass the reversal entry.
Issue of Debenture as Collateral Security
When an entity has to borrow funds from a bank or a financial institute such bank or financial institute shall not grant such loan amount until the entity provides with some collateral security in order to safeguard its interest. Bank shall always prefer to have as collateral the physical assets than any alternative means.
But if such physical asset does not cover the amount of loan as a collateral then the entity will issue the debentures as secondary security.
When an entity default in making payment of interest or principal amount of loan then the bank will first realize such amount outstanding by discharging the primary asset and if it does not cover the entire amount then the bank will have no choice but to claim its rights over the debentures so issued by the entity.
When the debentures are issued as collateral the entity has two options –
At the end of the accounting period the Debenture Suspense Account will be subtracted from Debentures Account on Equities and Liabilities side of the Balance Sheet.
At the time of repayment of the loan the entries passed above will be reversed.
The Debentures issued as collateral security shall be shown in the balance sheet if the company follows Option 1 as:
Extract of Balance Sheet as on 31/03/XXXX
Notes to Accounts:
The Debentures issued as collateral security shall be shown in the balance sheet if the company follows Option 2 as:
Extract of Balance Sheet as on 31/03/XXXX
Notes to the Accounts
It is preferable to use option 1 as the entity has some evidence and records of such transaction. Even though in actuality no amount was received by the entity at the time of transacting it.
I hope it was informative.
Aastha.
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