Insolvency Accounts 1

INSOLVENCY ACCOUNTS 1. Insolvency described.Up to this time only the accounting practice of
solvent business organizations has been considered. It now remains to consider the status of
insolvency. A concern may be forced into insolvency when its liquid assets are not sufficient in amount
to meet its current liabilities as they mature. This frequently occurs because an undertaking per mits
too much of its capital to be invested in fixed assets. There may be an excess of assets over lia bilities
but the current assets may not be sufficient in amount or may not be sufficiently liquid to enable the
proprietor to satisfy his maturing liabilities. A busi ness may also suffer losses which will reduce its as
sets to a sum less than the amount of its liabilities, in which case it will be insolvent even tho the under
taking has all its assets in liquid form.

2. Voluntary and involuntary the proprietor realizes clearly that the business is in solvent, either
because of his inability to pay his cur rent liabilities out of the current assets, or because the assets,
even tho current, are less than the liabilities, he may apply to a court Of competent jurisdiction for the
appointment of a person to take charge of the business and realize all that he can for the benefit of
the creditors. This proceeding is a voluntary one; the person selected to manage the business or to
whom the assets are turned over, is known as the assignee. Where the action against the debtor is
taken by credi tors who apply to a court for the appointment of a person to take charge of the business,
the proceed ings are said to be involuntary and the representative of the court who assumes charge
is known as the receiver.

3. The duties of the receiver.The assignee or the receiver is an officer of the court and is also a
repre sentative of the creditors; it is his duty to collect the assets; to take charge of the liquidation, if
such drastic measures are adopted by the creditors, realizing what he can for the benefit of the
creditors and paying the excess, if any, to the proprietor.

It is not to be inferred that liquidation follows in all cases; the creditors may permit the assignee or the
receiver to manage the undertaking for a period of time sufficiently long to rehabilitate the business.
The control of the property will then revert to its owners.

The receiver, upon his appointment, usually em ploys a competent accountant to make an inves%iga
tion of the concern's affairs and to render a report to him, showing the actual assets and liabilities of
the business. He will then have the assets valued by competent appraisers: After the appraisal and
after the creditors have presented their claims, the receiver will be in a position to know just what he
may ex pect to realize from the assets at forced sale and to what extent the various creditors of the
firm will be satisfied. The creditors, upon the receipt of this statement, may then decide whether or not
to extend further accommodation or permit the business to be disposed of.

4. Status of are four general classes of creditors; first, those holding preferred claims which, by virtue
of provisions of the stat utes, have a general lien on all the assets. They must be paid before any other
creditors are paid; these claims are ordinarily for taxes and labor liens. In a recently decided case the
Court of Appeals of the State of New York held that the unpaid salary of a bookkeeper was a preferred
claim which the indi vidual stockholders of a company are responsible for, and if only one stockholder
is able to pay he shall liquidate the debt. The second class of creditors is known as fully secured
creditors, so-called, because the individuals have security for the full amount of their claims. They will
realize on the security at the best price obtainable and will return any excess over their claims to the
receiver for distribution to the un secured creditors. The third class is known as par tially secured
creditors and includes all who have se curity for part of the amount of their claims and whose duty it is
to realize on the security which they hold and satisfy their claims as far as they may be able, from the
assets pledged to them. Such persons rank with the unsecured creditors for any portion of their claims
not satisfied. The fourth class, and in the majority of cases the largest both in number and amount, is
that class known as unsecured creditors. Persons in this class rank for payment equally in whatever
assets the receiver may have left after the first three classes have been satisfied.

5. Definition of the term "Statement of Affairs." The term "statement of affairs" is a technical term
used to designate a statement prepared by the account ant for a receiver or assignee showing the
assets at their nominal value as well as at their realizable value at forced sale, and the liabilities in the
order of their rank.

6. Relation of balance sheet to statement of affairs. Some authors have said that the statement of
affairs is an estimated balance sheet. This is an unhappy expression because, after all, a balance
sheet is a state ment of estimate or opinion and not a statement of fact. It is impossible to tell whether
or not the prop erty is stated at its true value in the balance sheet, since no one can say what the
amount of the actual depreciation on fixed assets has been. Furthermore, the merchandise on hand
as shown by the inventory may not realize the amount at which it is valued in the balance sheet, and
the accounts receivable may not all prove collectable. Moreover, the balance sheet sim ply aims to
show financial condition, stating assets at their book value and the liabilities with respect to their status
as fixed or current.

The statement of affairs, on the other hand, goes farther than the balance sheet, in that it not only
shows the assets at their book value but also the value that they are expected to realize at forced sale,
and in ad dition it shows the liabilities in the order of their rank. Obviously, a balance sheet prepared
in the usual man ner will not disclose as much information as the state ment of affairs. The ordinary
balance sheet will not show the status of the different creditors. Thus, if there are $75,000 worth of
assets and $100,000 worth of liabilities, a balance sheet prepared in the usual manner will indicate to
the creditors on its face that the concern will be able to pay 75 cents on the dollar. But if creditors
holding $25,000 in claims have liens on the assets amounting to $25,000, there will remain only
$50,000 worth of assets to pay claims amounting to $75,000; therefore, the unsecured creditors may
ex pect to receive, in this instance, only 66 2/3 cents on the dollar. Hence a balance sheet will not
disclose facts of vital importance to the partly secured and the unsecured creditors. The statement of
affairs pre sents this important information.

7. Parties at has been stated by some authors that the statement of affairs is made on be half of the
proprietor or on behalf of the creditors. This is not strictly true because the proprietor will have been
displaced either by the assignee or the re ceiver. The statement is prepared for the purpose

of enabling the receiver to make his report to the credi tors. The preferred creditors are not particularly
in terested in the which the accountant for the receiver prepares, because there will usually be suffi
cient assets to their claims. The statement is rather of interest to the creditors who are partially secured
since it enables them to know what loss they may expect to suffer on that portion of their claims which
is not secured. It is also interesting to the un secured creditors because the statement will disclose to
them what they may expect to receive out of the assets.

8. Mechanism, of the statement of affairs.There is no authoritative method of preparing the

statement of affairs but it is desirable, as a rule, to state the as sets in the order of their probable
realization. Under one form which is commonly employed, three money columns are provided; the first
column is headed "book or nominal values"; the second column is headed "ex pected to realize" and
the third column "deficiency." In the column headed "book or nominal values," the values at which the
assets are stated on the ledger are shown and it follows that if any reserves for de preciation have
been provided for any of the assets, the amount of such reserves will be deducted in stat ing the value
of the assets in the book value column.
Assets which have specific liens against them are stated short; for example, if the book value of the
land and buildings, after deducting the reserve for depreciation, was $90,000 and if there was a mort
gage on the property, with interest accrued amount ing to $86,000, the value stated in the "expected
to realize" column will be the equity of the proprietor in the property, or $4,000. It will thus be seen that
the "expected to realize" column will contain the as sets or the portion thereof which comes into the re
ceiver's hands free and clear of all claims which the receiver will be able to use for the satisfaction of
the claims of the unsecured creditors; a deduction of the amount of the preferred claims, which are a
general lien on all of the assets, is made from the total of this column since these claims take
precedence over the claims of fully secured creditors. After this deduc tion has been made, the
remainder represents the values which the receiver expects to have at his dis posal for the satisfaction
of the claims of unsecured creditors.

In stating the liabilities, two columns are provided, the first being headed "book or nominal values" and
the second, "expected to rank." The amount shown in the "book or nominal values" column is the
amount of the liabilities as shown by the ledger. Since the claims of fully secured creditors have been
deducted from the specific assets subject to lien, the amounts of these claims will not be carried into
the "expected to rank" column. Since the claims of partially se cured creditors have been deducted
from the assets which are their security, the amount of the excess of the claims over the anticipated
value of the security is carried in the "expected to rank" column. The total amount of the unsecured
creditors will of course appear in the "expected to rank" column. The claims of those who hold a
preference under the law will not, of course, appear in the "expected to rank" col umn since they have
been deducted from the aggre gate of free assets. The total of the "expected to rank" column contains,
therefore, the total of the un secured creditors' claims against which are offset on the other side the
net free and available assets. The net free assets are subject to deduction for the ex penses connected
with realization and liquidation, the amount of which cannot be foretold. The difference between the
total of the unsecured creditors and the total of the free assets, constitutes the deficiency.

It will be obvious that the deficiency stated pertains to debts inasmuch as the statement of affairs is a
statement of assets and liabilities only, ignoring the capital. The total deficiency representing the loss
not only to the creditors but also to the proprietor is shown by a deficiency account.

9. The deficiency account.It is usual to accom pany the statement of affairs with a deficiency ac
count giving details of the deficiency indicated by the statement. The account should start out from the
date at which the last balance sheet of the firm show ing a solvent condition was prepared. The
deficiency account will therefore reveal, on the debit side, the initial loss which may be called the
operating loss, since it has resulted in the status of insolvency. The account then states on the debit
side the anticipated loss incident to realization and liquidation and, on the credit side, any profit incident
to realization and liquidation. The balance of the deficiency account should then agree with the net
deficit as shown by the statement of affairs. It may be pointed out here that the form and manner of
arrangement of both the statement of affairs and the deficiency account vary.

10. Preparation of a statement of affairs for sole proprietorships or partnerships.The statement of

affairs of a sole proprietor will show as assets not only the assets which he has actively employed in
the busi ness, but also all his personal assets. This holds true because in law the business of John
Doe, pro prietor, is not a separate entity from John Doe him self. In the case of a partnership it must
be recalled that the rule of marshalling prevails, and that the personal creditors of the partners must
be satisfied out of personal assets and firm creditors out of firm assets and while, as a rule, the partners
are individually bankrupt when the firm is bankrupt, this situation may not always prevail and, therefore,
any excess from any one of the personal estates of the partners is available for the satisfaction of the
claims of the partnership creditors.
11. Theoretical value of the statement.The reader should remember that the statement of affairs is
merely an estimate of what a receiver expects or hopes he will be able to do and the original esti mate
is frequently far from correct. The law does not prescribe the manner in which a receiver shall keep
his accounts; of course he will charge himself in his accounting with what he takes over and credit
himself with what he divests himself of ; his account ing, like that of a. trustee, is an account of charge
and discharge. The receiver may continue to use the books of the old undertaking or may open an en
tirely new set of books; his convenience dictates his method of procedure but, in any event the books
of account are not adjusted to the facts shown in the statement of affairs. When the assets are realized,
the cash account will be debited and the particular assets will be credited, and as payments are made
to creditors cash will be credited and the appropriate liability account debited. After all of the assets
have been realized in cash, any balance remaining in an asset account represents the loss on
realization, and any liabilities remaining unpaid reflect a loss to the creditors. If the business is
controlled by a sole pro prietor, the accounts remaining open on the books are closed against the
proprietor's account. the case of a partnership, losses are charged against the capital accounts of the
partners in the ratio in which they share profits and losses, and if no assets remain available for
distribution the loss on realization and liquidation will of course equal the balances remain ing in the
partners' accounts. In the case of a cor poration, the original capital stock account will be debited for
the shares returned by the stockholders for cancellation and the remaining accounts will be adjusted
thru the surplus account. For the pur pose of illustrating the different methods that may be employed
in preparing statements of affairs and deficiency accounts, attention is called to the follow ing problem
which has been solved by two different methods: Jones and Robinson, merchants, are unable to meet
their obligations. From their books and the testi mony of the insolvent debtors the following state ment
of their condition is ascertained: Prepare a statement of affairs, showing the liabili ties and the assets
with respect to their realization and liquidation; also a deficiency account showing such details as
would account for the deficiency shown by the statement of affairs.

The statement of affairs shown on page 166 is ar ranged to disclose the exact status of the firm on the
date of December 15. The left-hand side of the state ment shows in one column the nominal or book
value of the assets. The second column shows the amount that we expect these assets to realize.
Creditors are not much interested in the book value of the assets, but they are interested to know how
much they may ex pect to realize from these assets. The total of this column after deducting
preferential claims is $27, 250. On the right-hand side of the statement are shown the liabilities. We
have there also two col umns, one showing the total or book liabilities and the other the amount the
liabilities are expected to rank. It will be noticed that the secured creditors are omitted entirely, since
they are not expected to rank to any amount as they are fully secured.

The partially secured creditors are shown in the total liabilities column for the full amount, while in the
column "expected to rank" only $20,900 as the securities in their possession as part pledge are esti
mated at $3,000. Preferential claims are entered only in the total liability column because they have
been deducted from the total assets. The total of the column "expected to rank" amounts to $45,900.
As the assets available for distribution amount to only $27,250, we have a deficiency of $18,650, which
is ac counted for and explained in the deficiency account shown on page 167.

This account begins on the debit side with the capi tal brought into the business at commencement,
amounting to $26,050. On the credit side are entered the losses on trading, as well as the trading
expenses, making the total $20,900. The second part on the same side deals with the losses and
shrinkages in values which amount to $6,400. Finally are entered the withdrawals amounting to
$17,400, thus showing a total on the credit side amounting to $44,700. Against this is the capital only,
amounting to $26,050, hence there is a deficiency amounting to $18,650, which is the exact sum
shown on the statement of affairs.

12. Realization, and liquidation account.The statement of affairs sets forth what the receiver may
expect to accomplish on the basis of forced liquida tion. If, after the receiver's report has been sub
mitted, the creditors decide to wind up the affairs of the insolvent business, the receiver realizes on
the assets and pays out the claims against the insolvent estate in the order of their rank. He disposes
of the assets, debiting his cash account for the amount re ceived on realization and crediting the
individual asset accounts. As claims are paid off, the appropriate liability accounts are debited cash
account is credited. After all the assets have been sold and the proceeds applied in the liquidation of
the liabili ties, the accounts remaining open on the ledger will be the balances in the asset accounts,
representing the excess or deficit of book value on realization, and the unliquidated liabilities and the
capital accounts of the proprietor or partners, or the capital stock and sur plus accounts of a
corporation.

The losses on winding up should be charged to the capital account of a sole proprietor or to the capi
tal accounts of partners in a partnership; in corpora tions, the losses will be charged against surplus.
The stockholders in a corporation will surrender their shares of capital stock, which will be debited to
capi tal account and credited to surplus. If the realiza

tion is conducted at a loss, the amount of unliquidated liabilities will of course equal the debit balance
in the capital account of a sole trader or the debit balances in the accounts of partners; in a corporation,
the debit balance in the surplus account will be equal to the amount of the unliquidated liabilities.

Should the receiver be fortunate enough to con duct the realization so as to obtain a surplus over the
book value of the assets at the time of sale, such ex cess will be credited to the surplus or individual
capi tal accounts. Very often the receiver will open up a "winding-up" account thru which the closing
opera tions will be entered.

13. Form of realization and liquidation account. The form of realization and liquidation account used
by teachers of accounting and employed in C. P. A. examinations is not a practical statement. It is
made up in either account or statement form. If the ac count form is used, the realization and liquidation
ac count is debited with the assets to be realized and credited with the liabilities to be liquidated. Cash
on hand is not included in the assets to be realized because cash is already realized. The statement
is then credited with the assets realized and debited with the liabilities liquidated. Any expenses of the
re ceiver in connection with realization and liquidation are debited to the account under the caption
"supple mentary debits"; any income collected by the receiver after he takes' charge is credited to the
account under the caption "supplementary credits." At the date of the accounting, the assets not
realized are credited to the account and the liabilities not liquidated are debited to the account. The
difference between the debit and credit sides of the account will then represent the profit or loss to
date on realization and liquidation. This account will not, however, show the details of the profit or loss
on realization and it is customary to supply a realization profit-and-loss account show ing the details;
this statement may of course be rec onciled with the profit or loss shown in the realiza tion and
liquidation account.

The cash transactions of the receiver are shown in a separate cash account because he is usually
paid on the basis of the cash received and paid out. The re ceiver's cash account will start with the
balance on hand at the time he took charge; it will be debited with the proceeds of the assets realized
and with any in come received by him during realization ; it will be credited with the liabilities liquidated
and with any expenses paid during realization. The balance of the two sides of the account may be
reconciled with the cash in the hands of the receiver. If the liquidation has not been completed at the
date of the accounting, it is customary to prepare a receiver's balance sheet which will show the cash
and other assets on hand at the date of the accounting; the liabilities unliqui dated will be stated and
the difference between the two sides will represent the profit or loss on realiza tion and liquidation to
the date of the accounting, as suming that the remaining assets will be liquidated at the values shown
in the books of the undertaking.
Preparation of the Statement of
Affairs (With Specimen)
According to Sec. 454, within 21 days of the date of the winding-up order to the
appointment of the official liquidator as provisional liquidator, the company has to
submit a statement to the official liquidator as to the affairs of the company unless the
Court otherwise orders. The statement must be in the prescribed form.

It must be verified by affidavit and must contain the following particulars:

(i) The assets of the company, stating separately the cash in hand and cash at bank and
negotiable securities.

(ii) The debts and liabilities of the company;

(iii) Names and addresses of its creditors, stating separately the amount of secured and
unsecured debts;

(iv) In the case of secured debts, particularly of the securities held by the creditors,
their value and dates on which they were given;

(v) The debts due to the company and names and addresses of the persons from whom
they are due and the amount likely to be realized;

(vi) Such further information as may be required by the official liquidator.

Prescribed Form of Statement of Affairs-[Form 57 of the Companies (Court)

Rules, 1959] is given:
Form of Statement of Affairs:
Statement as to the affairs of Ltd. on the day of 20; being the date
of winding-up order appointing provisional liquidator, or the date directed by the
official liquidator as the case may be, showing assets of estimated realisable values
and liabilities expected to rank.
 Top 8 Problems on Insolvency
Accounts | Accounting
Contents:
1. Accounting Problems on the Calculation of Different Forms of
Creditors
2. Preparation of Statement of Affairs and a Deficiency Account
3. Preparation of Statement of Affairs and Deficiency Account
4. Accounting Problem on Partnership
5. Preparation of Statement of Affairs and Deficiency Account
6. Preparation of Statement of Affairs and Deficiency Account of a
Individual Who is Declared as Insolvent
7. Preparation of Statement of Affairs and Deficiency Account of a
Individual Who is Declared as Insolvent
8. Preparation of a Deficiency Account and Statement of Affairs

How to Prepare Statement of

Affairs
At the time of liquidation of company, a very important statement is made for showing
estimated realizable value and liabilities expected to rank. That statement is called statement of
affairs. To prepare statement of affairs is also important because by making statement of affairs we
can know what amount of surplus or deficiency in balance. Company act 1956 has given its format.
Different items are estimated as per different lists. Now, we are preparing and explaining statement
of affairs according to list of assets and liabilities. You should remember statement of affairs all item
thoroughly. Difference between the estimated value of assets and liabilities will be estimated value of
surplus or deficiency.

1. List A : Assets not specifically pledged

First of all, we make the list of assets which are not on pledge. you should not take any loan by
giving these assets as security. We write these assets' estimated realizable value instead of book
valuebecause creditors are interested to know what amount will they receive after selling of these
assets in market. Value of call in area will be assets under list A.In these assets, we can include

i) Balance at bank
ii)) Cash in hand

iii) Marketable Securities

iv) Bills Receivable

v) Trade Debtors

vi) Loan and Advance

vii) Unpaid calls

viii) Stock in trade

ix) Freehold property

x) Leasehold property

xi) Plant and property

xii) Furniture Fittings, Utensils etc

xiii) Investment other than marketable securities

xiv ) Livestock

xv) Other property

2. List B : Assets Specifically Pledged

In list B, we include estimated realizable value of all the assets specially mortgaged, pledged, or
otherwise given as security. We also classify these pledged assets into under possession of
company and not under the possession of company. We will calculate surplus or deficiency after
deducting these assets' estimated realizable value from amount of secured loan and then adjusted it
in estimated realizable value of assets which are not pledged.

3. List C : Preferential Creditors

Now, we deduct preference creditors of list C from the total of List A and List B amount

4. List D : Debenture holders Secured by a floating

charges
The balance after deducting list c preference creditors is used for deducting the amount of
debentures secured by a floating charges and its payable interest.

5. List E : Unsecured Creditors

The balance of assets after deducting list d debenture holders amount is used for deducting the
amount of unsecured creditors.

6. List F : Preference Shares

In this list, we include all the payable amount of preference shares which is deducted
from realizable asset's balance after deducting list E's liability.

7. List G : Equity Shares

In this list, we include all the payable amount of equity shareholders which is deducted
from realizable asset's balance after deducting List F's liability. For calculating equity shares exact
value, we deduct irrecoverable unpaid calls.

8. List H : Surplus or Deficiency

Balance will be surplus or deficiency which will be included in list H

8 Essential procedure for preparation of statement of affairs

are:
1) First of all, take all assets which are not specifically pledged. These
assets are taken at their realizable values and not at book values
because creditors for their payment are concerned with the realizable
values of the assets. It may be noted that calls in arrears are also
treated as an asset not specifically pledged to the extent of estimated
realizable amount, but uncalled capital is not shown as an asset.

2) Add to the realizable value of the assets not specifically pledged, any
surplus from assets specifically pledged.

3) From the total as obtained by adding (1) and (2) first deduct the
amount of preferential creditors, then the amount of creditors having
a floating charge (e.g., debentures) and the result will be surplus or
deficiency as regards debenture holders.
4) Deduct the amount of unsecured creditors from the figure as
obtained in (3) above ; the resultant figure will be either surplus or
deficiency as regards unsecured creditors.

5) Deduct the amount of paid up share capital to the figure as obtained

in (4) above; the result will be either surplus or deficiency as regards
members or contributories.

6) Any likely expenditure on liquidation should be ignored. A note

may simply be given that deficiency or surplus as shown by the
statement of affairs is subject to the cost of liquidation.

7) Any unrecorded assets or liability should be shown both in the

Statement of Affairs and the Deficiency or Surplus Account to make
double entry complete.

8) Personal guarantee given by any party including the guarantees

given by the directors for loans raised by the company should be
ignored while preparing the statement of affairs.

Deficiency Account (Bankruptcy of

Company)
When any company becomes bankrupt, at that time, deficiency account is prepared. This account
shows the reasons of company's deficiency. Company's deficiency may be happened due to high
level of losses, decrease the value of assets or any other reason. This account is not made on
double entry system. But this account is the statement of simple calculations. First of all, we
make the list of items which either contribute the deficiency or increase the deficiency. After this,
we deduct the items which either reduce the deficiency or contribute the surplus. Following is its
proforma:

Particular Amount

{A} Items contributing to deficiency or reducing

surplus
1. Excess of capital and liabilities over assets as shown by balance sheet XXXXX
2. Net dividend and bonus declared during the period from end of financial
XXXXX
year to the date of statement of affair.

3. Net Trading losses XXXXX

4. Losses other than trading losses written off or for which provision has been
XXXXX
made in the books during the same period.

5. Estimated losses now written off or for which provision has been made for
XXXXX
purpose of preparing the statement

6. Other items contributing to deficiency or reducing surplus XXXXX

{B} Less Item reducing deficiency or contributing

surplus XXXXX

1. Excess of assets over capital and liabilities

XXXXX

2. Net trading profit

XXXXX

3. Profit and income other than trading profit during the same period.
XXXXX

4. Other Item reducing deficiency or contributing surplus

XXXXX

XXXXX
Deficiency or Surplus as per statement of Affairs

{ Important Note : From examination point of view matching of deficiency as per statement of affair
and deficiency as per deficiency account is one of good sign of your correct answer. }
Insolvency Accounts: Adjudication,
Procedure and Statement of Affairs
Insolvency Accounts: Adjudication, Procedure and Statement of Affairs!

Introduction:

A person is commonly said to be insolvent if he is unable to meet his liabilities

as and when claimed. That is, when a person becomes heavily indebted due
to various circumstances and it becomes impossible for him to pay his debts
fully. In law, the term insolvent is restricted to a person whose liabilities
exceed his assets and against whom the court makes an order of
adjudication.

Thus insolvent is a person who is not in a position to pay his liabilities in full
and has been declared as an insolvent by an Insolvency court. Insolvency
means the procedure by which the State takes in its possession the property
of the Debtor for realization and equitable distribution among the creditors of
the insolvent.

The proceedings in such cases are called Insolvency Proceedings. The terms
Insolvency and Bankruptcy are more or less synonymous. The word
Insolvency is used in India and Bankruptcy in England.

When a person finds it difficult to pay his liabilities in full, because of less
assets, he will be harassed by his creditors. The creditors will be pressing for
payment. When a person is in such a financial difficulties, the procedure is to
present an insolvency petition in a court by a Creditor or the debtor himself.
Petition by a Creditor can be made only if (1) the debt, singly or jointly, is at
least Rs. 500 and (2) the Debtor commits an act of insolvency.

Cases when the Act of Insolvency is Committed:

The act of insolvency is committed by a debtor in each of the following

cases:

1. When a person transfers his property, wholly or partly, to a third person for
the benefit of his creditors;

2. When he transfers his property with the intention to defraud or delay his
creditors;

3. When he notifies his creditors that he has suspended or is about to

suspend payment of his debts;

4. When he departs from or remains out of India;

5. When he departs from his dwelling house or usual place of business or

otherwise absents himself;

6. When the debtor is imprisoned in execution of a court degree for payment

money;

7. When any of the property of the debtor is sold or attached for a period of
not less than 21 days in execution of a degree of any court;

8. When he secludes himself so as to deprive his creditors of the means of

communicating with him;
9. When the debtor petitions the court to be adjudged an insolvent;

10. When an insolvent-debtor transfers property or pays a particular creditor in

preference to another creditor, more than what he could have got had the
insolvents assets been proportionately distributed amongst all the creditors,
he is deemed to have shown fraudulent preference in favour of a particular
creditor.

Order of Adjudication:

When a person commits an act of insolvency, a petition may be filed either by

himself or any of his creditors in a competent court for adjudication of the
person as an insolvent. On such a petition, if the court is satisfied, it will pass
an order of adjudication declaring the person as an insolvent.

Upon such an order, the property of the insolvent vests with the Official
Assignee under the Presidency Towns Insolvency Act, and, with the Official
Receiver, under the Provincial Insolvency Act, for equitable distribution
amongst the creditors.

Property Not Available For Distribution:

Properties held by the insolvent in his capacity as a trustee, bailee or other

fiduciary capacity, are not available for distribution amongst the insolvents
creditors. Similarly, under the Presidency Towns Insolvency Act trade tools of
the insolvent, wearing apparels, cooking utensils, bedding and furniture, not
exceeding Rs. 300 in value, are not available for distribution. The same is true
of pension, gratuity and provident fund received by an insolvent person.
Fraudulent Preference:

When the debtor transfers his property for fraudulent preference that is
fraudulent preference takes place when the debtor prefers one creditor to
another and pays the preferred creditor more than what he would have
received, had the assets been proportionately distributed among creditors of
the debtor. Upon an order of adjudication to preferred creditor will have to
return the money received by him.

Voluntary Transfer:

Voluntary transfer of property is said to take place when a person transfers it

to another without consideration. If the insolvent-debtor has voluntarily
transferred his property to another without consideration, during two years
preceding the date of order of adjudication, the same is void under the
Presidency Towns Insolvency Act.

However, such transfer is voidable as against the Official Receiver in the case
of Provincial Insolvency Act. As such, the same may be set aside by the court.

However, transfer is not void:

(a) When it is made in consideration of marriage, and

(b) When it is made in favour of a purchase or encumbrance in good faith and

valuable consideration.

Reputed Ownership:

The doctrine of reputed ownership is applicable to an insolvent trader,

engaged in regular trade or business with goods belonging to other persons.
According to this doctrine, if the insolvent carries on business with goods
belonging to others but in his possession with their consent, under such
circumstances as to be able to infer that he himself to be the true owner, such
goods can be taken to be the property of the insolvent for the purpose of
distribution amongst the creditors. The Official Assignee or the Receiver will
have a right to realize the property and distribute the proceeds amongst the
creditors.

This doctrine does not, however, apply to:

(a) Immovable property,

(b) Goods in possession of the insolvent as repairer or carrier, and

(c) Goods in possession of the insolvent as trustee.

Insolvency Procedure:

We discuss the whole procedure of Insolvency in the following points:

1. A petition for adjudication as insolvent may be presented either by the

debtor himself or by the creditor to the appropriate Insolvency Court.

2. A creditor shall not be entitled to present insolvency petition unless the

debt, singly or jointly, is at least Rs. 500 and the Debtor commits an act of
insolvency.

3. When the petition is admitted, the Court fixes a date for hearing the petition.

4. When the petition is admitted, Court may appoint an Interim Receiver to

take immediate possession of the property of the Debtor. The appointment of
the Interim Receiver is compulsory only when the petition is filed by the
Debtor himself.

5. The Interim Receiver functions till the regular officer is appointed.

6. On the date of hearing the petition, the court may either dismiss the petition
or pass an order of adjudication. If the court is satisfied that the petition is
reasonable, it shall make an order of adjudication.

7. It is only when this order of adjudication is passed that the Debtor is said to
have been declared insolvent.

8. As soon as the Debtor is thus declared insolvent, all his property vests in an
Officer, appointed by the Court to conduct the insolvency proceeding. The
officer is called Official Receiver, usually a lawyer, under the Provincial
Insolvency Act or Official Assignee under the Presidency Towns Insolvency
Act.

9. When the official Assignee or Receiver takes over the property of the
insolvent, it becomes his duty to sell the property with all convenient speed, at
reasonable price.

10. Out of the sale proceeds, the expenses of realization are met off and then
the liabilities of the insolvent debtor are paid off to the possible extent.

11. A debtor may, at any time after the order of adjudication and within the
period specified by the Court, apply to the court for an Order of Discharge.

12. The court may, if satisfied with the debtors conduct and the report of the
Official Receiver, grant or refuse an order of Discharge.
13. The court may pass either an absolute or conditional Order of Discharge.
On obtaining the order of absolute Discharge, the Debtor is freed from all his
liabilities and can start his life afresh.

The Order of Discharge will release the insolvent from all debts and removes
the disqualification imposed by the order of adjudication. He is not responsible
for any debt which could not have been paid in full during his insolvency
proceedings. Again, the Debtor becomes a free man and gets all the rights
and privileges of an ordinary citizen of the country.

There are two legislations in India to protect the interests of Debtors. One is
the Presidency Towns Insolvency Act of 1909 which is applicable to the cities
of Bombay, Calcutta and Madras. And the other is the Provincial Insolvency
Act of 1920 applicable to the rest of India.

The objects of Insolvency Legislations are to protect the Debtor from the
harassment by his creditors and secure an expeditious and equitable
distribution of his assets among the creditors. Both these Insolvency Acts
apply to individuals and not to Joint Stock Companies.

A person, adjudicated as an insolvent, has to make out and submit a

Statement of Affairs and a Deficiency Account. The Statement of Affairs
shows the insolvents financial position at the date of the order of adjudication
and the Deficiency Account explains how the deficiency appearing in the
Statement of Affairs has arisen.

Statement of Affairs shows the financial position of the Debtor on a particular

date. It is prepared in the prescribed form. It contains the details regarding the
assets and liabilities. Assets are shown at book value and realizable value
and liabilities are shown at book value as well as expected to rank values.

Format of Statement of Affairs:

The Statement of Affairs is prepared in the following manner:

A number of separate lists, called List A to H, are prepared and attached to
the Statement of Affairs given above. A Statement of Affairs, like a Balance
Sheet, is divided into two parts. Left-hand side of the Statement of Affairs is
liability and right-hand side of the Statement is assets.

The explanation of each List is given below:

1. List A-Unsecured Creditors as per List A:

This list includes all Creditors, who do not possess any security of the
Insolvent Debtor. That is, the Creditors without security fall under this list.

Some of such Creditors are:

Trade Creditors without security

Loan Creditors without security

Bank Overdraft unsecured

Bills Payable and Promissory Notes

Bills Receivable discounted likely to be dishonoured

Salary, Wages, Rent etc. over Preferential limit.

2. List B-Fully Secured Creditors:

This list includes all the Creditors, who have a claim against the debtor and
have obtained a lien, guarantee or possession of some deeds or other
securities. That is, the creditors, who have sufficient securities of the insolvent
Debtor to meet their claims. The value of the securities may be equal to or
more than the amount of their claims.
If there is any surplus of securities in the hands of fully secured creditors, such
surplus will be shown on the asset side of the Statement of Affairs and will be
available for distribution among the unsecured Creditors. For instance, if a
loan of Rs 10,000 has been taken on a security worth Rs 15,000, this loan is
fully secured. The Surplus of Rs. 5,000 (Rs. 15,000-10,000) is shown on the
asset side of the Statement of Affairs.

3. List C-Partly Secured Creditors:

There are certain Creditors, who have the security for a lesser value than the
amount of their claims. That is, the Creditors of this type got only partial
security for the loan advanced by them.

The securities are insufficient to meet the claims. For instance, a loan of Rs
10,000 has been taken and the security for this loan is only Rs. 6,000. So, the
loan is partly secured. The value of the security is not sufficient to cover their
claims fully. The excess of loan over the security is shown in the outer col-
umn.

4. List D-Preferential Creditors:

This list shows the Preferential Creditors, who are entitled to priority over
other debts of the insolvent. For instance, taxes, rates, wages, salaries etc.
are paid in full.

The following is the details of Preferential Creditors under the

Presidency Towns Insolvency Act and Provincial Insolvency Act:
The amounts of the Preferential Creditors, who are paid in full, are shown in
the inner column and this amount is to be deducted from the available assets.

The amount of salaries or wages or rent, in excess over the limit prescribed by
the law, shall be included in the list of Unsecured Creditors under List A. All
the above four lists, A to D, are shown in liability side of the Statement of
Affairs.

The following are the lists shown in the asset side of the Statement of
Affairs:

5. List E-Properties:

This is a list which includes all the assets of the Insolvent, except Book Debts,
Bills Receivable and assets which have not been given as security to
Creditors. Here all the assets-unencumbered properties i.e., free assets are
shown. For instance, Cash in hand, Cash at Bank, Furniture, Machinery etc.
Both book value and realisation value are shown.

6. List F-Book Debts:

All the debtors of the insolvent are shown in this list. Good, Doubtful and Bad
debts are shown separately.
7. List GBills of Exchange etc.:

This list contains the information about Bills Receivable and Promissory
Notes. The book value and the realizable value are shown separately.

8. List H-Deficiency Account:

This list shows the deficiency i.e., liabilities of the Debtors over realizable
value of his assets. For this purpose a separate Deficiency Account is
prepared. (This is explained separately.) Now, after writing the Lists E, F and
G, the surplus, as per List B, appears on the liability side, is added to the
assets. From this amount, the Preferential Creditors as per List D are
deducted. The balance, so arrived, is the amount of assets available for
distribution among the Creditors.
Deficiency Account:

In addition to various lists- Lists A to List G-the Debtor has to prepare a

Deficiency Account which explains as to how the deficiency shown in the
Statement of Affairs has arisen. The insolvent debtor is required to account for
the loss to the amount of his capital and of his Creditors.

On the left- hand side of Deficiency Account appears:

(1) The amount of capital,

(2) Increment to the Capital from the business i.e., profits, interest on capital,
salaries, commission etc.,

(3) Additional contributions and

(4) Realisation profits etc.

On its right side appear all the losses and withdrawals by which capital is
decreased. The difference between the two sides represents deficiency and
this must agree with the deficiency amount as disclosed by the Statement of
Affairs.

Specimen of Deficiency Account is shown below:

Priority of Payments:

The Official Assignee or Receiver realizes the assets and distributes the
proceeds in the following order of priority:

1. Fully secured creditors, in full

2. Partly secured creditors to the extent they are secured

3. Expenses of realisation and remuneration to the receiver

4. Preferential creditors

5. Unsecured creditors, including uncovered balance of partly secured

creditors.

Interest:

A creditor is not allowed to claim interest after the date of insolvency.

However, if all the claims have been satisfied in full, then till the date of
payment, interest @ 6% is allowed.

Loan from Wife:

If the wife has given the loan to her husband out of her personal property or
dowry or self-earned income, then the amount of loan is included in Creditors.
But if the wifes loan is out of the money given to her by her husband, then the
loan is taken as the capital of Insolvent, that is, such amount is not included in
the creditors list.
Illustration 1:
Sri Gobinda Chandra Sadhu khan is appointed liquidator of Sun Co. Ltd in voluntary
liquidation on 1st July 1993.

Following balances are extracted from the books on that date:

You are required to prepare a Statement of Affairs to the meeting of Creditors.

The following assets are valued as:

Bad Debts are Rs. 3,000 and the doubtful debts are Rs. 6,000 which are estimated to
realize Rs. 3,000. The Bank Overdraft secured by deposit of title deeds of Leasehold
Properties. Preferential Creditors are Rs. 1,500. Telephone rent outstanding is Rs. 120.
Illustration 2:
M. Co. Ltd. Went into voluntary liquidation on 1.3.2009.

The following are extracted from its books on that date:

Plant and Machinery and Building are valued at Rs. 1, 50,000, and Rs. 1, 20,000,
respectively. On realization, losses of Rs. 15,000 are expected on Stock. Book-Debts
will realise Rs. 70,000. Calls-in- arrear are expected to realise 90%. Bank Overdraft is
secured against Buildings. Preferential Creditors for taxes and wages are Rs. 6,000
and Miscellaneous Expenses outstanding Rs. 2,000.

Prepare a Statement of Affairs to be submitted to the meeting of creditors.

Illustration 3:
The following information is extracted from the books of Unlucky Ltd. on 31st July
2009, on which date a winding-up order was made:

In 2005 the company earned a profit of Rs. 45,000 but thereafter it suffered trading
losses totaling Rs. 58,400. The company also suffered a speculation loss of Rs. 5,000
during 2006. Excise authorities imposed penalty of Rs. 35,000 in 2007 for evasion of
tax which was paid in 2008. From the foregoing information, prepare the Statement of
Affairs and the Deficiency Account.
Problems on Insolvency Accounts
1. Accounting Problems on the Calculation of Different Forms of
Creditors:
Mr. X of Calcutta, finding himself unable to meet his
creditors, has to prepare a Statement of Affairs for which
the following particulars are available:
Leasehold Property Rs. 1,00,000, estimated to realise Rs. 90,000;
Plant and Machinery Rs. 40,000, estimated to realise Rs. 30,000;
Stock-in-trade Rs. 20,000, estimated to realise Rs. 14,000; Book
Debts; Good Rs. 60,000, Doubtful Rs. 5,000, estimated to realise
50%; Bad Debts Rs. 14,000.

Bills in hand Rs. 3,750.

Life Policy for Rs. 25,000 whose surrender value is Rs. 5,000 held by
insurance company against a Loan of Rs. 2,000.

Household furniture Rs. 3,600; Household Debt Rs. 2,900; Bills

Discounted Rs. 6,000; Rs. 2,000 likely to be dishonoured. Loan on
Mortgage of Leasehold Rs. 50,000.

Cash in hand Rs. 100.

ADVERTISEMENTS:

Bank Overdraft secured by personal guarantee of Xs brother and

second mortgage on Leasehold, Rs. 50,000.

Unsecured Creditors Rs. 1,50,000; Loan from N. Rs. 2,500 secured by

a second charge on life policy. Ground Rent on leasehold for three
months accrued Rs. 250.

He could not pay his office clerks (two in number) salaries for six
months, Rs. 1,500, and also rates and taxes amounting to Rs. 1,500.

Prepare a Statement of Affairs.

ADVERTISEMENTS:

Solution:
Before preparing the Statement of Affairs of Mr. X., we are
to calculate the different forms of creditors:

2. Preparation of Statement of Affairs and a Deficiency Account:

From the following Trial Balance of Mr. X who commenced
business on January 1 1990, you are asked to prepare a
Statement of affairs and a Deficiency Account:
Missing Information:
Sometimes the full information relating to the Deficiency Account is
not available. In that case, students are advised to prepare a trial
balance on the basis of book value figures and not on the basis of
estimated realisable value and calculate the difference between the
totals of the two sides which, in other words, should be considered as
the value of missing information.
3. Preparation of Statement of Affairs and Deficiency Account:
From the following information prepare a Statement of
Affairs and Deficiency Account of Mr. Ashis Sadhukhan who
was declared insolvent under the Provincial Towns
Insolvency Act:
His capital was Rs. 7,000 and his drawings were Rs. 7,000.

His assets consisted of:

(i) Book Debts Rs. 10,000 of which Rs. 8,000 was considered good
and the balance estimated to produce Rs. 1,000.

(ii) Stock (book value Rs. 15,000) estimated to produce Rs. 9,000.

(iii) Machinery (book value Rs. 16,000, cost Price Rs. 18,000)
estimated to produce Rs. 11,000.

(iv) Freehold house (private property) valued at Rs. 12,000 the debt of
which was lodged with the bank as security for an overdraft on
business account Rs. 8,000.

(v) His life policy (surrender value Rs. 6,000) was given as a part
security for a private loan of Rs. 10,000. His unsecured creditors
amounted to Rs. 40,300 and he owed Rs. 500 to his clerk being salary
for two months just preceding the date of his insolvency.

Solution:
From the above problem, it becomes necessary to prepare a trial
balance in order to calculate the missing information relating to profit
and losses of the business i.e., for preparing Deficiency Account. It
should be remembered that at the time of preparing trial balance,
private assets (i.e. Freehold House, Life Policy etc.) and private
liabilities (i.e. loan) are not to be considered at all.

Moreover, book values of assets are to be taken into consideration and

not the cost price.
Notes:
It has been pointed out above that while preparing Trial balance
private assets and private liabilities are not to be considered at all. But
the same are to be taken into consideration while ascertaining
insolvency losses. Private assets either increase capital of the
proprietor or increase assets in the Statement of Affairs. In the present
case, however, as private assets have been given as security, as such,
liabilities have been reduced and that is why the same is not shown as
an asset.

4. Accounting Problem on Partnership:

On 31st August 1998, an order of adjudication as insolvent was made
against X and Y who carry on partnership business.

The balances in the firms book as on that date included the

following:

During the 13th months to 31st August 1998 X drew Rs. 40,000 and Y
Rs. 30,000. Private assets of X and Y amounted to Rs. 4,000 and Rs.
3,000, respectively. Book Values of these assets were Rs. 7,000 and
Rs. 5,000, respectively. Y had private liabilities of Rs. 12,000.

You are required to prepare:

1. Individual partners Statement of Affairs and Deficiency Accounts.

2. The firms Statement of Affairs and the Deficiency Account.

Before preparing the Deficiency Account, we are to prepare
the following Trial Balance in order to find out the profit or
loss of the firm:
5. Preparation of Statement of Affairs and Deficiency Account:
The assets of Mr. Z on 30th June 1990, as shown by his books of
accounts, were Rs. 1,68,000 and his liabilities Rs. 1,32,000. He filed
an Insolvency petition in the court and estimated his deficiency to be
Rs. 90,000.

After making the above estimate he found that the following

items were not passed through his books of account:
(a) Interest at 6% p.a. on his capital from 1st January 1990.

(b) A contingent liability of Rs. 7,500 for bills discounted by him for
Rs. 15,000.

(c) Amount due as wages Rs. 900; as salaries Rs. 2,100; as Rent
Rs. 900; as Rates & Taxes Rs. 600.

Prepare Mr. Zs Statement of Affairs and his Deficiency Account.

6. Preparation of Statement of Affairs and Deficiency Account of
a Individual Who is Declared as Insolvent:
From the following information prepare a Statement of Affairs and a
Deficiency Account of Mr. X who is declared insolvent on 31st
December 1999. Total creditors Rs. 62,000 including preferential
creditors Rs. 1,000. Secured creditors holding a first charge on
Building Rs. 15,000 and another secured creditor holding a second
charge on Building Rs. 14,000. Building (Book value Rs. 32,000);
estimated to realise Rs. 25,000; Debtors Rs. 18,000 (Bad Debt
estimated Rs. 2,000). Machinery estimated to realise (60% of book
value) Rs. 12,000. Stock (Book Value Rs. 6,000) estimated to realise
Rs. 4,000. Bank Balance Rs. 1,000.

He commenced his business on 1.1.1995 with an initial Capital of Rs.

20,000. His drawings were Rs. 200 more than those of the previous
year. His drawings were Rs. 1,800 in the year 1999.

The profit of business in first four years was Rs. 4,200. But in the last
year business incurred a loss of Rs. 5,200. He paid Rs. 4,000 to his
creditor friend on 8.12.1999 by fraudulent preference. He gifted Rs.
1,000 to his daughter on the occasion of her marriage on 9.12.1999. A
discounted bill of Rs. 1,200 was dishonoured on 31.12.1999.
Amount of Drawings to be calculated as under:
1999 Rs. 1,800; 1998 Rs. 1,600; 1997 Rs. 1,400; 1996 Rs. 1,200; 1995
Rs. 1,000.

Notes:
1. Gift made to daughter amounting to Rs. 1,000 is treated as
Drawings.
2. Rs. 4,000 paid to creditor friend by fraudulent preference is
absolutely void and, as such, the same has been added back to
creditors as also increased by debtors for the like amount.

7. Preparation of Statement of Affairs and Deficiency Account of

a Individual Who is Declared as Insolvent:
Mr. Bad is insolvent. He supplies to you the following
information as on March 31,1990
Mr. Bad commenced business six years ago with a capital of Rs.
43,750. He drew Rs. 8,750 each year for private purposes, but did not
maintain proper books of accounts. Mrs. Bad gave up her jewellery
valued at Rs. 7,000 to the receiver.

Prepare the Statement of Affairs and Deficiency Account of Mr. Bad.

3. It has been assumed that Mrs. Bad had given loan from her
Stridhan and, as such, the same has been included in unsecured
creditors.
8. Preparation of a Deficiency Account and Statement of Affairs:
On 31st December 1994 Sarbasanta files his petition in bankruptcy on
which date the receiving order was made. You are instructed by the
official receiver in bankruptcy to assist the debtor in the preparation of
a Deficiency Account and Statement of Affairs.

Your investigations disclosed the following:

Liabilities:
His liabilities amount to Rs. 3,50,000 of which Rs. 74,000 was fully
secured, Rs. 38,000 partly secured; Liabilities for rent, wages etc. were
Rs. 4,500 claimed to be preferential. There was also a contingent
liability of bills under discount of Rs. 27,400 of which Rs. 2,000 was
expected to rank.

He has household furniture of the estimated value of Rs. 2,500, and

life policies of the surrender value of Rs. 6,000. The two latter items
were not in his books of accounts.

Out of liabilities for rent etc. Rs. 2,000 was admitted as preferential.

On 1.1.1992 his capital was Rs. 1,30,000.

During the three intervening years, trading results, interest

on Capitals and drawings were:
Out of drawings Mrs. Sarbasantas purchased ornaments for Rs. 5,000
which she offers to Mr. Sarbasanta for paying loans. These are
estimated to fetch Rs. 6,000, Rs. 30,000 loss in 1993 (included in Rs.
75,000 above) was due to speculations.

Solution:
In order to find out trading loss for 1994 the following trial
balances as well as the capital accounts are to be prepared:

Before preparing the Statement of Affairs and Deficiency

Account, we are to calculate the amount of unsecured
creditors:
Unsecured Creditors:
Note:
1. It has been assumed that the ornaments were purchased not out of
Stridhan.
Illustration 1:

What are Preferential Creditors in the following liabilities of an insolvent,

Gopal, according to the Presidency Towns Insolvency Act and
Provincial Insolvency Act? Also point out the unsecured creditors.

Illustration 2:

On 1st April 2003, Mohan commenced business with a capital of Rs. 63,500.
His profits for the years 2003-04 and 2004-05 amounted to Rs. 55,540. He
suffered a loss of Rs. 25,000 in the year 2005-06. His total drawings up to
31st March 2006 were Rs. 90,000.
From the following figures, prepare a Statement of Affairs and
Deficiency Account of Mohan as at 31st March 2006:
Illustration 3:

The assets of a merchant on 30th June 2005 as shown by his books were Rs
56,000 and his liabilities Rs 44,000. He filed his petition in the Insolvency
Court and estimated his deficiency to be Rs 30,000.

After making the above estimate he found that the following items were
not passed through his account book:

Interest at 6% on his capital from January 2005.

A contingent liability of Rs 2,500 on Bills discounted by him for Rs 10,000.

Amount due as wages Rs 300

Salaries Rs 700

Rent Rs 300

Rates and Taxes Rs 200.

Prepare his Statement of Affairs and Deficiency Account.

Illustration 4:

Liability on Bills discounted Rs 500, expected to rank Rs 100. His household

furniture etc. was valued at Rs 250. He owned a house valued at Rs 750,
having mortgage on it of Rs 600 at 4%. Interest paid up to the preceding 31st
December.

Preferential Creditors amounted to Rs 35 (included in Sundry Creditors) and

Rs 15 for Rates on the house. Prepare a Statement of Affairs and Deficiency
Account.
Illustration 5:

He commenced business with a capital of Rs 39,000 on 1st January 2003 and

made a total profit of Rs 6,250 during the period of three years. His total
drawings during the above period amount to Rs 17,500.

Prepare a Statement of Affairs and a Deficiency Account.

Illustration 6:

Mr. X filed his petition on 31st March 2005. From the following information,
prepare Statement of Affairs and Deficiency Account in respect of Mr. X.
Cost of winding up comes to Rs 2,820. State the amount of dividend which
could be expected to be paid.
Illustration 7:

Babu Ram of Bangalore commenced business on 1st January 2001 with a

Capital of Rs 1, 32,000. He drew on the average Rs 12,000 a year. His profits
for 3 years were Rs 28,000; he did not maintain proper accounts for the next
two years. On 31st December 2005 an adjudication order was made against
him.

He submits the following information from which his Statement of

Affairs and Deficiency Account are to be prepared:
Solution:

The business results of 2004 and 2005 are not given in the problem.
Therefore, Trial Balance has to be prepared to find the profit or loss during
2004 and 2005.
Illustration 8:

Mr. Kuber is an insolvent.

He supplies the following information as on 31st March 2005:

He had discounted Bills of Rs 10,000 of which bills worth Rs 3,000 are likely
to be dishonoured. Prepare the Statement of Affairs and Deficiency Account
assuming that Mr. Kuber resides in Madras.
Illustration 9:

A finding himself unable to meet his liabilities filed his petition on 31st
December 2005. From the details obtained, you are asked to prepare
Statement of Affairs and Deficiency Account:

Unsecured Creditors amounted to Rs 9,030

Creditors for Rent and Taxes are Rs 500 but only Rs 300 of this can rank as
preferential.

There are contingent liabilities on Bills discounted amounting to Rs 2,500 of

which the sum of Rs 1,000 is expected to rank. Fully secured Creditors for Rs
2,000 have a charge of mortgage on the buildings.

A had a surplus of assets of Rs 5,000 on 1st January 2002. He had been

withdrawing for his private expenses Rs 800 a year. It appears from his books
in the first and second year that he has made a profit of Rs 2,850 and Rs
1,800 respectively and losses in the third and fourth year of Rs 2,000 and Rs
2,100 respectively, after allowing Rs 200 a year by way of interest on Capital:
Surplus of Rs 200 is available from his private estate.
Insolvency of an Individual and of Partnership Firm:

In case of an insolvency of individuals, no distinction is made between private

assets and business assets and private liabilities and business liabilities. But
in case of insolvency of a firm, a distinction is made between the assets and
liabilities of the firm and the assets and liabilities of the individuals.

Private assets should first be utilised for paying off private liabilities and
similarly business assets are to be utilised for paying off the liabilities of the
business. If there is any surplus at one place, that can be transferred to the
other, if necessity arises. But, it must be remembered that the deficiency of
any partner will never be transferred to the firm. That is, if partners private
assets are less than his private liabilities, the deficiency is not made good by
using the assets of the firm.

In case of insolvency of the firm, separate Statement of Affairs and Deficiency

Accounts are to be prepared for the firm and for each of the partners. We may
come across situations, where a partner helps the firm in getting a loan by
mortgaging his private property and in such cases, the Creditors will first
recover the money, whatever they can, from the firm and the amount which
could not be recovered from the firm is recovered from the security given by
the partner.

10 Illustration:

A and B are in partnership and file their petition in bankruptcy. From the
following particulars, prepare the Statement of Affairs and Deficiency Account
of the firm as on December 31, 2005.
Note: In case of insolvency of a firm, it becomes essential to prepare
Statement of Affairs and Deficiency/ Surplus Accounts of partners individually
so that any surplus or shortage on account of private properties can be
revealed. If there is a surplus, then it is used for making the payment of the
firms liabilities. If there is a deficiency, then there is no responsibility of the
firm to pay them.