ADVANCE ADJSUTMENT

Hello

Small trading firm having less then 20lacs turnover annualy .

In balance sheet there is loan and advances  in total of 25 lacs to various parties but it could not be recorvered and not the firm is making losses and wish to close in next 2 to 3 years 

what if the amount is not recovered can we still show as bad debt and close the firm in next 3 years 

 

please advise appropriate solution

 

 

Replies (3)
Quick Summary
A small trading firm with unrecoverable loans and advances totalling £25 lacs is considering writing them off as bad debts to facilitate closure within 3 years. While writing off bad debts is possible, specific conditions like prior provisions and certainty of irrecoverability must be met. The process involves a board resolution and accounting entries. Importantly, writing off advances previously shown as such, rather than income, typically offers no immediate tax benefit and may still incur tax liabilities. The advice suggests delaying the write-off until the firm is certain about closure and exploring potential tax benefits at that time.

 Given the situation, you can write off the loan and advances as bad debts, but there are specific conditions and procedures to follow:

Conditions for Writing Off Bad Debts:

1. *Provision for Bad Debts*: You must have made a provision for bad debts in the previous years' financial statements.

 2. *Reasonable Certainty*: You must be reasonably certain that the debt is irrecoverable.

3. *Written Off*: The debt must be written off in the books of accounts. .

Procedure for Writing Off Bad Debts:

1. *Pass a Board Resolution*: Pass a board resolution to write off the bad debt.

2. *Make a Provision*: Make a provision for bad debts in the financial statements.

 3. *Write Off the Debt*: Write off the debt in the books of accounts. Tax Implications:

 1. *No Tax Benefit*: Writing off bad debts does not provide any tax benefit.

 2. *Tax Liability*: You may still be liable to pay tax on the written-off amount if it was previously claimed as income.

 Closing the Firm:

1. *Follow the Procedure*: Follow the procedure for closing a firm, including filing the necessary returns and obtaining the necessary approvals.

2. *Settle Outstanding Liabilities*: Settle all outstanding liabilities, including taxes, before closing

thank you foryour response 

 

sir wehave shown in previous year as advance given to parties  and not as income  so in this case even if i write off the amount i need to pay tax for the same 

Don't write it off. If you create a provision for it, it must be dealt with immediately by the end of year. So leave it and make that provision when your certain that your closing the firm. Check out if you get any tax benefit and write it off this year if you wish to. 

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