Advance given but not adjusted

No.

then what should be the treatment

If Financial year has changed like advance was given in 2006-2007 which should have been adjusted in 2006-07 itself but was not adjusted, then

in FINANCIAL YEAR 2007-08 IT WILL come SEPARETLY UNDER "PRIOR PERIOD EXPENSES" as per AS - 5

and IF it is in the same Financial year and the difference is only in the QUARTER CLOSING like it should have been adjusted in1st Quarter but It was later on adjusted in 4th quarter then there is no issue..

Advance is for what?

Usually for Construction / alteration of a building or its interiors (which however cannot be treated as Capital Nature) amounts are spent in various parts. So there exists a practice to accumulate such expenses in a separate account with the nomenclature Deferred revenue expenditure. On completion of the work such expenditure wil be amortized in parts depending upon its usefulness.

 Dear Shyam,

Deferred expenditure are different from Advance for expenses. This wil be carried as Advance paid only, because as per the accrual concept this expense will only be considered only in case the service for the consideration is received. If the expense is of capital nature the expenses can be allocated only after we actually receive the service/goods. So, as per my view you can not treat it as deferred expense but should be carried as "Advance" only.

As you are saying the advance is not adjusted, that can also mean the advance was ignored while making the payment, in this case it should be adjusted for the service/good recieved in respect of which the advance was paid.

Dear Ankit,

I agree with your view. But the problem is that the organisation where i am assigned for internal audit has given the advance for rent, but they have no agreement for this. And also they are paying factory rent to the party. and thus advance against rent remain intact for more than 5 years.

As we know such advance cannot be adusted in the future, then why should we show it as Asset?

So in order to write off such advance what can we do????? please advice?

 Dear Shyam,

I am a PCC student and appeared in Nov 09 and waiting for my results to be out. So i might be wrong in my comments and suggestions. Then also i am trying my best to use best of my knowledge to comment on the issue.

See, if the organisation have that advance intact, i advise them to give them a plea that it is advance paid on rolling basis each year and it is not the same advance as paid 5 years back. This can be easily showed by the company to the authorities, they just have to correct some journal entries.

But on the other side as your question suggests that the concern want to write off such expense. I will advise to simply settle it as bad advance paid for service never received. As the period i also of 5 years we can easily claim the party on the other to be of default, as they provided no service for the period.

Please let me know in case you have any more clarifications on the case. 

Dear Ankit.. I like your thought process but one has to be remember that solutions that are provided in a manner not accepted under the proper ambit of law are alwaysbound to attract higher trouble in future..

Imagine if the expenditure is disallowed in future by AO it would mean Tax+Interest+Penalty too much for too little i guess.

And words such as we can prove no services were recd can be proved.. I know we need to be accommodative but remember there is always a cost benefit analysis and from the words of Shyam it seems it is a concern of a decent size so a small tax saving could lead open Pandora's box i guess

The best possible way is to treat it as Prior Period expenses and transfer to appropriation account.