Loan settled so accounting entry to be passed

This query is : Resolved

Monika (Querist)
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01 March 2019 One of my client had availed loan of Rs. 20 lacs in 2015 and later on defaulted in last 12 payments amounting to Rs. 5 lacs appx. After discussion with lenders both agreed to settle the same for Rs. 4.50 lacs. The company paid Rs. 4.50 lacs and settled the a/c in books of lenders and also received the NOC. Now balance Rs. 0.50 is outstanding in loan account but it is not to be repaid. Please guide as to what should be it's accounting treatment. Which entry should be passed in books of company to close the loan account.

Please guide

Thanking you in advance.

CA CS Chirag

CA CS Chirag (Expert)
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04 March 2019 The account on the credit you hit will be an “Other Income” account. the amount that need not to be repaid will have to be shown as your indirect income.

Monika

Monika (Querist)
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25 March 2019 Just wanted to know, since the principal has not to be repaid so should it be shown as income in P/L Account or transferred to Capital Reserve Account as this I don't think would be considered as income to be shown in P/L A/c.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 When a company settles a loan for an amount less than the outstanding principal, the accounting treatment depends on how the settlement is treated and the terms agreed upon with the lender. Here’s how to handle the settlement in your books:

### **Accounting Treatment for Loan Settlement**

**1. **Settlement of Loan Account:**
- **Loan Account:** Rs. 20,00,000 (Original Loan)
- **Outstanding:** Rs. 5,00,000 (Principal Default)
- **Settlement Amount Paid:** Rs. 4,50,000
- **Amount Not Repaid:** Rs. 50,000

**2. **Journal Entries:**

**a. Record the Settlement Payment:**
When you pay Rs. 4,50,000 to settle the loan, make the following entry:
```plaintext
Dr. Loan Account Rs. 20,00,000
Cr. Bank Account Rs. 4,50,000
Cr. Settlement Gain (P&L Account) Rs. 15,50,000
```
- **Loan Account**: Reduce the loan balance by the total amount (Rs. 20,00,000).
- **Bank Account**: Reflect the payment made.
- **Settlement Gain**: Recognize the difference between the outstanding amount and the settlement amount. The gain of Rs. 15,50,000 (i.e., Rs. 20,00,000 - Rs. 4,50,000) needs to be accounted.

**3. **Handling the Rs. 50,000 Not Repaid:**

- **Capital Reserve**: Generally, any amount that is settled for less than the outstanding liability is considered as a gain. Since the Rs. 50,000 is not required to be repaid, you should treat this amount as a gain.

**Journal Entry:**
```plaintext
Dr. Loan Account Rs. 50,000
Cr. Capital Reserve Account Rs. 50,000
```
- **Loan Account**: Close out the remaining balance.
- **Capital Reserve Account**: Transfer the unrepayable amount here. This is because, in accounting terms, this amount does not fit into the Profit & Loss Account but rather adds to reserves.

### **Summary:**

- **Principal Settlement:** Account for the principal repayment of Rs. 4,50,000.
- **Remaining Principal Not Repaid:** Recognize the Rs. 50,000 as a gain, typically transferred to Capital Reserve rather than showing it as income in the Profit & Loss account.
- **Profit & Loss Impact:** The gain from settlement can be recognized in the Profit & Loss statement if it is part of normal operations. If not, it should be transferred to a reserve account.

**Note:** Ensure that you comply with any specific guidelines or standards that might apply based on your local accounting regulations or standards (such as Ind AS in India).

**Consultation:** It is advisable to consult with a chartered accountant to confirm the entries and treatment in accordance with the latest accounting standards and legal requirements.