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Expenses write back

manas bhatt (CA) (83 Points)

21 October 2011

Interest accrued on loan is written off as expense alongwith principal amount in earlier year. The whole amount is received in current year. what is the treatment to be given to each component ie. interest and principal? please quote the AS or statutes.

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10 Replies

Phalgun (Audit Manager) (327 Points)
Replied 21 October 2011

Interest on loan & Repayment of Principal.

Principal amount is a liability. depending on short term or long term the amount will be credited to liability account.

Interest on loan is an expense. As per Accrual Concept (The moment an expense is incurred or income is earned, it has to be charged to p& l a/c). Interest on loan is a chargeable expense not written off expense.

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Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 21 October 2011

For an additional information, on long term Loans, current portion is Current liabiltiy according to US GAAP, but I think Indian AS do not treat like that!!!

CA Neha Jain (Practicing CA) (218 Points)
Replied 21 October 2011

I understand that the loan and interest was receivable and the same was written off in earlier year due to non-recovery.

Now, on receipt of the same it will be treated as other income and will be shown as seperate line item under other income schedule.

In Income tax, it will be chargeable to tax u/s 41 if the write off of the same was allowed as an expenses in that year.

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Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 21 October 2011

At the time of grant of loan & booking of intt. income:

1) Loan A/c Dr.------------B/s

To Bank A/c-------B/s

2) Accrued Intt Dr.--------B/s

To intt. income A/c-------P&L

At the time of write off of loan and intt.:

Debit balance w/o A/c Dr--------P&L

To Loan A/c-------------B/s

To Accrued intt A/c -----------B/s

At the time of receiving back amount :

Bank A/c Dr.-------B/s

To Amount w/o earlier now recovered A/c ----P&L

Plz correct me if m wrng

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manas bhatt (CA) (83 Points)
Replied 21 October 2011

Thanks Neha. what abt the principal amount received now which was earlier shown as assets and wriiten off as non-recoverable?

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Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 21 October 2011

the principal amount recd will now be taxable as the same would hav been allowed as deduction at the time of write off......

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manas bhatt (CA) (83 Points)
Replied 21 October 2011

Sumit, that is logical. but do you have anything to support it?

CA Neha Jain (Practicing CA) (218 Points)
Replied 21 October 2011

Entries given by Sumit are absouletely correct.

1 Like

capandureddy (Chartered Accountant) (44 Points)
Replied 21 October 2011

Give me a small clarification Mr.Manas Bhatt whether you are asking this doubt for banking company or Finance company if so what type of loans you are giving why I have asked I will explain you

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CA Abhijeet Parab (Practising CA) (21 Points)
Replied 25 October 2011

Dear Manas,

Principal amount is never allowed as a deduction (unless it is a trade receivable like Trade Debtors). It is a capital loss and therefore it is to be transferred to Capital A/c (non-co. assessee) or to Reserves (Co. assessee).

Therefore, interest received in the next year will be taxed as Other Income and Principal amount received should be transferred to Capital Account or Reserves. If at all the principal amount was wrongly claimed and allowed as deduction, it will be Other Income during the year it again becomes receivable.