Could you please explain how to account for below mentioned transaction: A machinery for Rs. 500000/- was purchased and installed on 01-04-2008. Depreciation charged on straight line basis @ 20% for the period April 2008 to March 2011. Out of Rs. 500000/-, only 350000/- was paid as final settlement, since the machinery supplied was not performing as per standards set. Now our auditors asked us to revert back the amount of Rs. 150000/- standing to the credit of vendor account. The ledger account balance as on March 2011 was as follows: Machinery A/c: 500000 Accumulated depreciation A/c: 300000 Vendor A/c: 150000
Dear Rahul, This issue is more about legal issue other than the accounting treatment. How you entered agreement with the Vendor in 2008 is to be read before taking decision on accounting treatment. If you have legal right to write-off Rs.1.5 lac to be paid to the vendor, you can write-off the same. After write-off, we have to consider showing the same as contingent liability depending on the strength of our case.