car loan o/s in balancesheet

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 May 2011 1 ) if a firm was purchased a car of rs 1900000/-, same loan from sbi of rs. 1900000/- as on 23/08/2011.of 12 instalment,
instalment is Rs. 165278 ( prin. rs 158334/- & int is rs. 6944/- ) firm has paid 7 instlment up to 31/03/2011. and in firm b/s shows RS. 791670/- ( prin o/s RS. 158334*5 instlment)..now iffect of interest of RS 34720 ( 6944* 5 month inst) is shown in balance sheet or not?
please giv reasn.

2) in p&l a/c only 7 month interest is debeted or full 12 month int is debited?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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18 July 2024 Let's address your queries regarding the treatment of car loan outstanding in the balance sheet and the interest in the profit and loss account:

1. **Treatment of Interest in Balance Sheet:**
- The outstanding loan amount on the balance sheet should reflect the principal component of the loan that is yet to be repaid. In your case, the firm has paid 7 installments up to 31/03/2011, leaving 5 installments unpaid.
- The balance sheet should show the principal outstanding as of the balance sheet date (31/03/2011), which would be the remaining principal after deducting the installments paid. So, the principal outstanding should be \( 158,334 \times 5 = 791,670 \).
- The interest accrued on the loan (Rs. 34,720 based on your calculation) typically does not appear on the balance sheet. The balance sheet reflects the financial position at a specific point in time (31/03/2011 in your case), and accrued interest is considered a liability that will be paid in the future but not yet due as of the balance sheet date. Therefore, accrued interest is usually not shown separately on the balance sheet but may be mentioned in the notes to the financial statements.

2. **Treatment of Interest in Profit and Loss Account:**
- The interest expense in the profit and loss account should reflect the total interest payable for the financial year. Since the loan is for the entire year, the interest expense for the year should include the interest accrued on the loan for the full 12 months.
- Therefore, in the profit and loss account (P&L), you would typically debit the interest expense for the full 12 months (April to March in your case) based on the annual interest rate and the outstanding principal amount at the beginning of each month.

In summary:
- The balance sheet should show the principal outstanding of the loan (Rs. 791,670 in your case) as a liability.
- Accrued interest (Rs. 34,720) is not shown on the balance sheet but may be disclosed in the notes to the financial statements.
- The profit and loss account should reflect the interest expense for the entire financial year (April to March), covering the interest accrued on the loan.

This approach ensures that both the balance sheet and the profit and loss account accurately represent the financial position and performance of the firm regarding the car loan.

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