How to reflect entry of damages claimable

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

02 February 2014 I received an order for manufacturing of spares with an advance of Rs. 1,50,000/- against an order value of 6,00,000/-.
Party refused to take delivery.
sent legal notice.
sold the goods as scrap for 80,000/-.
Rs. 5,20,000/- is under recovery.
i am to file a money suit for recovery of damages.
how to account as copy of ledger has to be submitted.
stock a/c 6,00,000/-
debit to
sales 8,00000/-
mr.purchaser(advance received)1,50,000/-
Mr. purchaser(under recovery/ salvage loss)3,70,000/-
please enlighten.

Querist : Anonymous

Querist : Anonymous (Querist)

03 February 2014 A reply from experts is solicited.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
Follow

28 July 2024 To accurately reflect the accounting entries for the situation where you have a claim for damages due to a party refusing to take delivery, you need to account for various components such as the advance received, sales, salvage of scrap, and under-recovery of the order value. Here’s how you can account for these transactions:

### **1. Accounting for the Sale and Advance Received**

#### **Initial Sale and Advance Receipt**

When you receive the advance and book the order, you make the following entries:

**Date: [Order Date]**

**1.1. Record the Advance Received:**
- Debit: Bank (or Cash) ₹1,50,000
- Credit: Advance from Customers ₹1,50,000

**1.2. Record the Sale (when goods are delivered):**
- Debit: Accounts Receivable ₹6,00,000
- Credit: Sales ₹6,00,000

### **2. Accounting for the Party Refusing Delivery**

When the party refuses to take delivery, you need to adjust your accounts for the sale, record the salvage value, and account for the loss and under-recovery.

**Date: [Date of Refusal]**

**2.1. Record the Sale Reversal and Scrap Sale:**

Since the party refused to take delivery, the sale should be reversed, and the salvage value should be recorded.

- **Reversal of Sale:**
- Debit: Sales ₹6,00,000
- Credit: Accounts Receivable ₹6,00,000

- **Record Salvage Sale:**
- Debit: Bank (or Cash) ₹80,000
- Credit: Salvage Income ₹80,000

**2.2. Record the Loss and Under-Recovery:**

You need to recognize the loss due to the refusal and under-recovery:

- **Under-Recovery:**
- Debit: Loss on Order ₹5,20,000
- Credit: Accounts Receivable ₹5,20,000

### **3. Accounting for the Advance and Legal Claim**

When you are filing a legal suit for recovery of damages, you should recognize the advance received and the legal claim:

**Date: [Date of Legal Notice]**

**3.1. Record the Advance Reversal:**
- Debit: Advance from Customers ₹1,50,000
- Credit: Bank (or Cash) ₹1,50,000

**3.2. Account for the Legal Claim:**
- Debit: Legal Claim Receivable ₹5,20,000 (to recognize the receivable amount)
- Credit: Loss on Legal Claim ₹5,20,000 (if recognizing as a loss in your accounts)

### **Journal Entries Summary**

**1. Advance Received:**
```
Bank/Cash A/c Dr. 1,50,000
To Advance from Customers A/c 1,50,000
```

**2. Sale Entry:**
```
Accounts Receivable A/c Dr. 6,00,000
To Sales A/c 6,00,000
```

**3. Reversal of Sale:**
```
Sales A/c Dr. 6,00,000
To Accounts Receivable A/c 6,00,000
```

**4. Salvage Sale:**
```
Bank/Cash A/c Dr. 80,000
To Salvage Income A/c 80,000
```

**5. Loss and Under-Recovery:**
```
Loss on Order A/c Dr. 5,20,000
To Accounts Receivable A/c 5,20,000
```

**6. Advance Reversal:**
```
Advance from Customers A/c Dr. 1,50,000
To Bank/Cash A/c 1,50,000
```

**7. Legal Claim (if applicable):**
```
Legal Claim Receivable A/c Dr. 5,20,000
To Loss on Legal Claim A/c 5,20,000
```

### **Notes:**

- Ensure you have proper documentation to support each entry, including legal notices, scrap sale invoices, and details of the under-recovery.
- If the legal claim is expected to result in a successful recovery, you may need to adjust the entries once the recovery is made.
- Consult with a professional accountant or financial advisor to ensure compliance with accounting standards and tax regulations.

By following these steps, you will accurately reflect the damages claimable and other related accounting entries in your ledger.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now