In order to tacle with the shortage and non-availability of Raw Material, One Company purchases Raw Material from one of its Agent at agreed price i.e, SAUDA PRICE. And what the agent does, it receives material from some other parties and supplies it to the Company. However, Bill is of very less price than the SAUDA PRICE. There is no bill issued by the agent to the company in its own name. Bill is issued directly by the party. But as per deal company has to pay the SAUDA PRICE. Billed amout is paid to the Selling Party and the Difference between SAUDA PRICE and Billed Price is booked by the company is PURCHASE EXP. and credited to the Agent Acccount.
Company passes the following Accounting Entry to record the above transaction:-
Purchases A/C Dr. With Billed Amt.
VAT/CST A/c Dr. WIth Billed Amt.
Purchase Expenses A/c Dr. With Diff Amt. (SAUDA-BILLED Amt)
To Creditor A/c WIth Billed Amt.(Pur. + VAT/CST)
To Agent's A/c WIth Difference Amt.
However there is no written agreement between the company and agent for such a dealing. There is not a uniform %age of margin in each transaction. In some transactions the margin is very high.
Company is not paying any separate amount to the agent as Commission. Company is not deducting any TDS from the agent.
In order to tackle with the prob. of Non-Availability of Raw Material, company is doing this.
Hence My Questions are:
1. Whether the Accounting Entries passed above are correct ?
2. Is is justified to treat the difference as Purchase Expenses ?
3. If it is not correct treatment, then what should be the right treatment ?
4. Is there any legal remedy to face such situation ?
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