Chit a/c - urgent

This query is : Resolved

Shaik Shair Ali (Querist)
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28 March 2013 Dear Sir i did not understand how to maintain books for Chit Instalments paid.
For Example:
chit value: 10,00,000/-
No. of Inst: 25
Monthly Inst: 40,000
Now i have received chit dividend of Rs.1,92,000/- and paid amount of Rs.2,88,000/- for 12 months upto March then what amount should be taken in Balance Sheet in Assets/Liabilites side, Profit & Loss A/c etc and in another case if i have auctioned the chit and received chit bid amount of Rs.7,00,000/- then what to do?

Thanks in advance sir

Dintakurthi Tirumala

Dintakurthi Tirumala (Expert)
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28 March 2013 You have two types of accounting treatment one is considering loss or gain on chit at the time of completion of chit(i.e cash basis) and another method is considering loss or gain through out the chit period(i.e accrual basis).

If you want to offer profit or loss on chit at the time of completion of chit period then accounting treatment is as follows

At the time of payment of chit amount(subscription)

Chit a/c dr
To Cash/ban a/c
(with the amount of chit actually paid i.e Rs.2,88,000 for your case for 12months)

At the time of receipt of bid amount

Cash/bank a/c dr
To Chit a/c
(with the amount of bid received)

And at the time of completion of chit period. I.e after payment of all instalments of chit verify the chit a/c showing balance if it is showeing debit balance then it means we paid excess amount then we received bid amount so it is loss to us. In case chit a/c showing credit balance then we received excess amount through bid than we paid so it is profit to use so pass the following entry at the time of completion of chit period and balance transfer to P&L account

Loss on chit a/c dr
To chit a/c
(Being loss on chit transfered to P&L account)(Note: Loss on chit should be grouped under P&L a/c)

or

Chit a/c dr
To Profit on chit a/c
(Being gain on chit received in the form of net dividend transfered to P&L account)(Note: Profit on chit a/c should be grouped under P&L a/c)

In case if you want to recognise profit or loss propertinatly through out the chit period(i.e accrual basis) then follow the following entries.

At the time of payment of chit subscription and receipt of dividend

Chit a/c dr 4800000
TO Cash/bank a/c 288000
To Dividend on chit a/c 192000

(Being chit instalment of XX paid through cheque no.XXXX vide r.no:XXXX and dividend on such instalment received)

Note: the above entry is for two months because of you provided 12 months date so i considered that for your explanation you pass the same with monthly payment and dividend details at the time of payment.

At the time of receipt of bid amount

Cash/Bank a/c dr 700000
To Chit a/c 700000
(Being chit auctioned and bid amount received through cheque no.XXX)

At the time of receipt of bid amount you shall estimate the future liability of chit payable and add this to the chit account and balance shall be written off over to the balance period of chit amount as proportinate and any balance will treat it as unexpired loss on chit. For your clarification and under stand the following example

Assuming by March'13 you have completed 12 instalments of the chit, you paid Rs.2,88,000 and dividend of Rs.1,92,000 and you have received the bid amount of Rs.7,00,000 in the month of February'13 Thus you have future liabilty of bid is Rs.5,60,000 for 14 future instalments @40,000 at the time of receipt of Bid. So accounting entries and estimation of loss is as follows

You have to pass the above entries i said to payment and receipt of BID thus your chit account shows credit balance of Rs.2,60,000 as on the date of receipt of BID i.e as on 28-2-2013 so to this add the future liability of Rs.5,60,000 as on the date of bid received i.e on 28-2-2013 thus your chit account in your future will show debit balance of Rs.3,00,000 as on 28-2-2013 thus it will be the loss to you in future for 14 months as on the date of receipt of bid. So this amount shall be written of for 14 months thus for 2012-13 you have to write off one month loss.
Continution in next reply.

OM SAI SRI SAI JAI JAI SAI

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Dintakurthi Tirumala

Dintakurthi Tirumala (Expert)
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28 March 2013 At the time of bid amount received pass the following entry to reconginse the loss on chit in future

Unexpired loss on chit a/c dr 300000
To Chit a/c 300000
(Being chit loss in future period expected)

Here Unxexpired loss on chit shall be recongnise under current asset.

and at the end of the year i.e on 31st march transfer unexpired loss on chit to loss on chit account for that year. Thus for F.Y 2012-13 you have to recognise loss for only one month so on 31-3-2013 pass the following entry

Loss on chit a/c dr 21429
to Unexpired loss on chit a/c 21429
(Being loss on chit for the year written off)

Loss on chit a/c shall be treat under P&L account

Thus net dividend income for F.y 2012-13 is Rs.1,70,571(192000-21429)

Instead of creating of loss on chit a/c to written off the loss of chit you can debit the divident account then entry is

Dividend a/c dr 21429
To Unexpired loss on chit a/c 21429
(Being unexpired loss on chit written of for the year 2012-13 and written of to Dividend) then also net dividend is Rs.1,70,571.

Instead of creating of unexpired loss you can recognise net loss at the time of completion of period of chit by transferring the debit balance in chit account at the end of the period to loss on chit account. Thus entry is

At the end of completion of chit period to recongise loss

Loss on chit a/c 300000
To Chit a/c
(Being difference amount between chit amount and bid amoun received transfered to loss on chit)

So you have three options to make accounting of chit transactions.

1) Making only payment entry i.e not considering dividend at the time of payment and at final i.e after completion of period of chit recognising of gain or loss on chit

2) Making payment entry as well as recognising of dividend at the time of payment and creating unexpired loss in the year of bid amount received and written off to loss on chit from unxpired loss on chit through out the balance period of chit from the month of bid amount received

3) Making payment entry as well as recognising of dividend at the time of payment and recognising of loss on chit in the year of chit term completed.

But according to me i suggest option 2 because of option 1 gives higer gain or loss in the year of chit period completed thus either has over tax or lower income as well as in option 3 may give higher loss in the year of completion of chit period thus lower income will appear.

If you have any futher clarification and any doubts please write to me i will clarify you.

If you understanded the above explanation and treatment and you are able to make the accounting to your actual transactions with the above based example then okay. Otherwise i.e you are not followed the system and still unable to make the accounting entries then please send me PM with the details of chit as follows.

Chit commencement date:
Month wise payment and dividend details
Bid amount receipt date
period of chit
chit instalment amount etc...

by providing your email id. I will mail you with the entries how to pass.

OM SAI SRI SAI JAI JAI SAI

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