Bank acquired fixed asset of company for loan realisation

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

04 May 2013 there was an outstanding amount of Rs.40L of Cash credit in books of account from bank.
Then the bank aquired the asset (Book value is 20L) for realisation of its loan.and sold them for Rs.40L.

So what would be accounting entry for the above scenario in books of the company.

Anil Sankar V

Anil Sankar V (Expert)
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04 May 2013 IN the books of company as

Bank Loan A/c dr 40 lacs
To Fixed asset a/c 20lacs
TO Reserve a/c 20lacs

Querist : Anonymous

Querist : Anonymous (Querist)

08 May 2013 THANX
BUT why reserve account it can be credited to P & L a/c ?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 In the scenario described, where the bank acquires an asset to realize its loan and subsequently sells it, the accounting entries would typically be as follows:

### Assuming the Steps:

1. **Initial Outstanding Amount of Cash Credit:**
- Assuming the company had an outstanding amount of Rs. 40 lakh in Cash Credit from the bank.

2. **Bank Acquires the Asset:**
- The bank acquires an asset from the company to settle the loan. The book value of the asset is Rs. 20 lakh.

3. **Sale of the Asset by the Bank:**
- The bank sells the acquired asset for Rs. 40 lakh.

### Accounting Entries:

#### When the Bank Acquires the Asset:

- **To record the acquisition of the asset:**

**Asset Account (e.g., Inventory, Equipment, etc.)** Dr. Rs. 20,00,000
**Bank Loan (Cash Credit) Account** Cr. Rs. 20,00,000

- This entry reflects the transfer of the asset to the bank in settlement of the loan. The asset is recorded at its book value of Rs. 20 lakh.

#### When the Bank Sells the Asset:

- **To record the sale of the asset:**

**Bank Account** Dr. Rs. 40,00,000
**Asset Account** Cr. Rs. 20,00,000
**Profit on Sale of Asset (P&L Account)** Cr. Rs. 20,00,000

- This entry records the sale of the asset by the bank.
- The bank debits its account (increasing its cash balance by Rs. 40 lakh).
- The asset account is credited to remove it from the books.
- The profit on the sale of the asset is credited to the Profit and Loss Account (P&L Account), representing the gain realized on the sale.

### Why Credit the Profit to the P&L Account Instead of a Reserve Account?

- **Profit Recognition Principle:** According to accounting principles, profits and losses from regular business activities are generally recorded in the Profit and Loss Account (P&L Account).

- **Reserve Accounts:** Reserve accounts are typically used for specific purposes such as retaining profits for future investments, paying dividends, or covering contingencies. They are not usually used to record gains or losses from regular trading activities unless there's a specific policy or requirement to do so.

- **Transparency and Reporting:** Crediting the profit to the P&L Account ensures transparency in reporting the company's financial performance. It reflects the actual gain made from the sale of the asset during the current accounting period.

### Conclusion:

In summary, the accounting entry for the scenario described involves initially transferring the asset to the bank to settle the loan and then recording the subsequent sale of the asset. The profit on the sale is credited to the Profit and Loss Account (P&L Account) to accurately reflect the company's financial performance. Reserve accounts, on the other hand, are typically used for different purposes and may not be appropriate for recording gains or losses from regular business transactions like the sale of assets.