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The balance sheet disclosed a footnote, contingent liability for 5000 in respect of a bill discounted. The bill was received from megha. On the date of dissolution of firm megha was declared insolvent and was not able to pay the amount due. The bill had to be met by the firm. Pass journal entry ?
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The balance sheet disclosed a footnote, contingent liability for 5000 ...
**Journal Entry for Contingent Liability**
To record the contingent liability in respect of the bill discounted, the following journal entry needs to be passed:
1. **Debit Contingent Liability Account:** The contingent liability account is debited to recognize the potential obligation arising from the bill discounted. This account represents the liability that may or may not materialize depending on the outcome of an uncertain future event. In this case, the contingent liability account will be debited with the amount of 5000.
2. **Credit Megha's Account:** Since the bill was received from Megha, her account needs to be credited to reflect the contingent liability arising from her inability to pay the amount due. By crediting her account, we are reducing her outstanding balance in the books of the firm.
3. **Credit Bill Payable Account:** The bill payable account is credited to reduce the liability associated with the bill discounted. As the firm is now obligated to meet the bill, the liability is transferred from the contingent liability account to the bill payable account.
**Explanation:**
1. **Contingent Liability:** When a firm recognizes a potential obligation that may arise in the future due to an uncertain event, it is recorded as a contingent liability. In this case, the firm has disclosed a contingent liability of 5000 in respect of a bill discounted. This means that there is a possibility that the firm may have to pay the amount due if Megha fails to fulfill her obligation.
2. **Insolvency of Megha:** At the time of the firm's dissolution, Megha was declared insolvent, indicating that she was unable to meet her financial obligations. As a result, the firm becomes responsible for paying the amount due on the bill discounted.
3. **Debit Contingent Liability Account:** The contingent liability account is debited to recognize the potential obligation arising from the bill discounted. By debiting this account, the firm acknowledges the possibility of having to pay the amount due in the future.
4. **Credit Megha's Account:** Megha's account is credited to reflect the contingent liability arising from her insolvency. This reduces her outstanding balance in the books of the firm and represents the amount she is unable to pay.
5. **Credit Bill Payable Account:** The bill payable account is credited to reduce the liability associated with the bill discounted. As the firm is now obligated to meet the bill, the liability is transferred from the contingent liability account to the bill payable account, reflecting the actual liability of the firm.
By recording this journal entry, the firm recognizes the contingent liability and adjusts its accounts accordingly to reflect the potential financial impact of the bill discounted.
To record the contingent liability in respect of the bill discounted, the following journal entry needs to be passed:
1. **Debit Contingent Liability Account:** The contingent liability account is debited to recognize the potential obligation arising from the bill discounted. This account represents the liability that may or may not materialize depending on the outcome of an uncertain future event. In this case, the contingent liability account will be debited with the amount of 5000.
2. **Credit Megha's Account:** Since the bill was received from Megha, her account needs to be credited to reflect the contingent liability arising from her inability to pay the amount due. By crediting her account, we are reducing her outstanding balance in the books of the firm.
3. **Credit Bill Payable Account:** The bill payable account is credited to reduce the liability associated with the bill discounted. As the firm is now obligated to meet the bill, the liability is transferred from the contingent liability account to the bill payable account.
**Explanation:**
1. **Contingent Liability:** When a firm recognizes a potential obligation that may arise in the future due to an uncertain event, it is recorded as a contingent liability. In this case, the firm has disclosed a contingent liability of 5000 in respect of a bill discounted. This means that there is a possibility that the firm may have to pay the amount due if Megha fails to fulfill her obligation.
2. **Insolvency of Megha:** At the time of the firm's dissolution, Megha was declared insolvent, indicating that she was unable to meet her financial obligations. As a result, the firm becomes responsible for paying the amount due on the bill discounted.
3. **Debit Contingent Liability Account:** The contingent liability account is debited to recognize the potential obligation arising from the bill discounted. By debiting this account, the firm acknowledges the possibility of having to pay the amount due in the future.
4. **Credit Megha's Account:** Megha's account is credited to reflect the contingent liability arising from her insolvency. This reduces her outstanding balance in the books of the firm and represents the amount she is unable to pay.
5. **Credit Bill Payable Account:** The bill payable account is credited to reduce the liability associated with the bill discounted. As the firm is now obligated to meet the bill, the liability is transferred from the contingent liability account to the bill payable account, reflecting the actual liability of the firm.
By recording this journal entry, the firm recognizes the contingent liability and adjusts its accounts accordingly to reflect the potential financial impact of the bill discounted.
Community Answer
The balance sheet disclosed a footnote, contingent liability for 5000 ...
Realisation a/c. 5000
To Bank a/c. 5000
To Bank a/c. 5000
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The balance sheet disclosed a footnote, contingent liability for 5000 in respect of a bill discounted. The bill was received from megha. On the date of dissolution of firm megha was declared insolvent and was not able to pay the amount due. The bill had to be met by the firm. Pass journal entry ?
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