Loans

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

08 January 2011 Mr. X is a director of his private co. with 95% share in it(means he has sold the co.) Now he has sold his entire share to Mr. Y. In prev. financial year there was a loan given by Mr. X in the co. of Rs. 102000. Now after sale of the shares what should be the accounting for the loan

CA Shailesh Kumar Bhagat

CA Shailesh Kumar Bhagat (Expert)
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08 January 2011 i do not think any change in accounting in the book of X ( personal ).

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 When a director sells his shares in a private company, and there is an outstanding loan from the director to the company, the accounting treatment for the loan needs careful consideration. Here’s how you should handle it:

### **1. Accounting Treatment for the Loan Post-Sale**

**A. Outstanding Loan Liability:**

- **Loan from Director:** The loan of ₹1,02,000 given by Mr. X remains a liability on the company's books. Since Mr. X has sold his shares, the company is still obligated to repay the loan unless there is an agreement to the contrary.

**B. Accounting Entries:**

1. **Recognize the Liability:**
- **No Change in Liability:** The liability towards Mr. X remains until it is either repaid or formally waived. The loan account should continue to reflect this amount until settled.

2. **Repayment or Settlement of Loan:**
- **Repayment:** If the company repays the loan to Mr. X, the accounting entry will be:
```plaintext
Debit: Loan from Director (Liability) ₹1,02,000
Credit: Bank/Cash ₹1,02,000
```
- **Waiver of Loan:** If Mr. X agrees to waive the loan (i.e., forgives the loan), the accounting entry will be:
```plaintext
Debit: Loan from Director (Liability) ₹1,02,000
Credit: Income/Capital Reserve ₹1,02,000
```
This treatment assumes that the waiver is not considered as income under any special circumstances; otherwise, it may be treated differently based on specific legal and accounting guidance.

**C. Sale of Shares Impact:**

- **Director's Share Sale:** The sale of shares to Mr. Y does not directly impact the accounting for the loan. The loan remains a liability of the company until settled.
- **No Automatic Write-Off:** The company’s obligation to repay the loan is independent of the share transfer. The company must settle or renegotiate the loan terms with Mr. X or his representatives.

### **2. Additional Considerations**

**A. Legal Agreements:**
- **Review Agreements:** Check any legal agreements related to the sale of shares. There might be terms covering the handling of outstanding loans or financial obligations.

**B. Disclosure in Financial Statements:**
- **Disclosure Requirements:** Ensure that the loan and any changes in its status are properly disclosed in the company's financial statements as per accounting standards.

**C. Tax Implications:**
- **Tax Treatment:** Consult with a tax advisor to understand any tax implications of the loan waiver or repayment, as there might be tax consequences based on the nature of the loan and the transaction.

### **Summary**

The accounting for the loan after Mr. X sells his shares to Mr. Y involves:

1. **Maintaining the Loan Liability:** Continue to show the loan as a liability until it is repaid or formally waived.
2. **Repayment or Waiver:** Account for the repayment or waiver of the loan according to the agreement with Mr. X.
3. **Review Legal and Tax Implications:** Ensure compliance with legal agreements and understand any tax implications.

Consult with accounting and legal professionals to ensure proper handling of the loan in accordance with applicable laws and regulations.

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