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Entry for advance received against asset forfeited

A learner (Corporate Accounts ) (345 Points)

03 December 2010

Dear All,

Please suggest me accounting treatment for advance received against capital asset and forfeited by Co.

Is it revenue in nature and should be shown in extraordinary income?

or is it a capital receipt and should be part of capital reserve?

Would be grateful, if you can please share facts, guidance notes etc. in support of your view, as mere views without logic will be of little help to me..

Many many thanks for your prompt replies.

Thanks & Regards,

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4 Replies

CA Deepesh Ruhela (Keen to Learn) (3271 Points)
Replied 04 December 2010

it is capital receipt because its against capital asset & its not ordinary activity. therefore it should transfer to Capital Reserve.

CA Tarkeshwar (job) (77 Points)
Replied 07 December 2010

dear friend

there is no standards and guidance notes relevant to your query, the logical answer is as follow

If capital asset is fixed assets, it can not be the revenue income , but the extra-ordinary income. the advance received might be for sale of capital capital and subsequently neither transfer of capital asset take place nor refund of advance, so the entries is for writting off the advance in the statement of profot and loss account by passing the following entries

Advance from Mr. .................A/c .........................Dr.

To Profit or loss a/c

(Being forfeiture of amount received in advance for sale of capital asset)

and should be shown as extraordinary income

If the person is engaged in the business of hire-purchase sale, this income may be in nature of operating activities

Rajesh (Articled Clerk) (50 Points)
Replied 09 December 2010

According to me, the income should form a part of capital reserve firstly as it is of a non recurring nature and secondly the income is much similar to that of a sale of capital asset in a very short span of time