Accounting Treatment

Accounting treatment of some specific items in the Profit & Loss Account and Balance

Sheet is being explained as follows:

• Income Recognition:

  The banks have been recently advised by the Reserve bank of India that they should identify the non-performing assets and ensure that interest on such non performing assets (NPA) is not recognised as income and taken to the profit and loss account w.e.f financial year 1992-93. The term non performing assets means a credit facility in respect of which the interest/instalment remains 'past due' for a period of two quarters i.e. six months

• Bad Debts and Provisions for Doubtful Debts:

  The business of banking depends on public confidence. In order to ensure that this confidence is not impaired, the banks till recently were given a special privilege permitting them not to show in their published account bad debts and provisions for doubtful debts. They could show income after making deductions for such losses. In the Profit and Loss account the income from 'interest and discount' was usually shown after meeting such losses. In the Balance Sheet, the amount of advances was shown after deducting bad and doubtful debts.

As per recent directive of the Reserve Bank, provision for doubtful debts has to be created on the various advances on the following basis:

• Standard Assets: These include advances which are not non-performing assets. No provision is required for such advances.
• Sub-Standard Assets: These are advances which have been classified as non performing assets and are outstanding for a period not exceeding two years. A provision of 10% is required for such advances.
• Doubtful assets: These are advances which remain classified as non performing assets for more than two years.
• Loss Assets: These include advances which are fully and or substantially non recoverable and the security value in respect of them is negligible.  100% provision is required for such assets.
• Assets for which borrowers liability is less than Rs. 25,000: 5% of the aggregate liability has to be provided as a general provision.