02 May 2009
A Company is not having sufficient revenue for giving arrears of salary but it has huge balance in general reserves.
Method 1: Can it debit General Reserve directly
Method 2: or the arrears of salary has to pass through P&L A/c only and later on debit balance in Accmuluated P&L is set-off against General Reserves. In that case, P&L will show a loss but if former is the case, P&L will continue showing profit.
Personally, i think method 2 only is allowed as arrears of salary is an expenditure and has to be matched against revenue to find out Net Profit in spirit of AS 5. Though company is insisting on method 1, Can it be allowed?
02 May 2009
Second method will be more appropriate.
The problem in first method is you have to show it a prior period items and you want to set off against earlier profits but there is a danger you will lose the income tax benefit for that expenditure.
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