Reconciliation of Sister concerns...Urgent Sir...

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Rajesh (Querist)
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20 September 2010 Dear Experts,
If A firm and B firm are sister concerns.
In the books of A firm Rs.1,00,000 is receivable from B firm. In the books of B firm 40000 is payable to A firm. The difference in these balances exists 4 or 5 years. The accountant of the B firm claims that it has been settled in cash but not been accounted in the books of B firm.
Which is the best way to sort out of this problem. Can i ask the client to pass the following entry.
A Firm A/c Dr.60000
To P&L A/c 60000
(Being the liability no longer required)
Is this the way it has to be treated?
Some people suggests to pass the following entry.
A Firm A/c Dr. 60000
To Partners Current A/c 60000
(current a/c shall be credited in the profit sharing ratio)

Which of these method is legally correct?
If any scrutiny comes in the later date...the ITO might object for the 2nd type of entry.

Pls. guide me which path is right and which one to be followed.

With regards,
Rajesh.

Thrissurkkaran Ishtan

Thrissurkkaran Ishtan (Expert)
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23 September 2010 Entries will differ based on scenarios:

Scenario 1 - Amount was not paid by Firm B. Write off to P&L. It may or may not be disallowed (most likely later) by ITO.
Scenario 2 - Amount was received but was taken by partners. Show as drawings. I don't see any reason why ITO wants to object to this.

So select one of these scenarios (rather ascertain which one is true or more closely true) and follow it

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