In a company a contractor had been engaged for some installation, commissioning work at its plant. The contractor had to deposit 10% of the contract price(Extent of Rs.2.00 Crore) as security deposit (interest free) for successful and timely completion of the work. Otherwise the money will be forfeited.
The contractor failed & money forfeited. This shown as income in revenue account.
The auditor states that " unless board consent obtained that forfeited money cannot be shown as income". Our view is "no such consent required" as forfeiting resulted into reduction of a liability and simultaneous increase in revenue/income. Is our view is correct? Regards Abhijit
If the terms of contract and internal policy regarding authorisation of forfeiture have been adhered to, then the same can be treated as income. No need for separate approval for accounting the same as income. The accounting is as per GAAP.
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