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CA Intermediate · Advanced Accounting · AS 4 Contingencies and Events occurring after the Balance Sheet Date

Ganga Textiles Ltd. closes its books for the year ended 31 March 2025. The financial statements were approved by the board on 20 May 2025. On 28 April 2025, a major customer, whose debt of ₹6,00,000 was outstanding at 31 March 2025, was declared insolvent, and the company learnt that nothing would be recovered. No provision had been made earlier. How should this be treated in the financial statements for 2024-25?

The company should adjust the 2024-25 accounts and provide for the full ₹6,00,000 bad debt. The customer's insolvency after the balance sheet date confirms a condition that existed at 31 March 2025, making it an adjusting event under AS 4 rather than a mere disclosure item.

  1. AAdjust the accounts by providing for the bad debt of ₹6,00,000 in 2024-25Correct
  2. BOnly disclose the event in the notes without adjusting the amounts
  3. CRecognise the loss in the financial year 2025-26
  4. DIgnore the event as it occurred after the balance sheet date

Explanation

Customer insolvency after the balance sheet date, relating to a debt outstanding at the balance sheet date, provides evidence of conditions existing at that date. It is an adjusting event under AS 4, so ₹6,00,000 is provided in 2024-25. Mere disclosure or deferring to 2025-26 would misstate the year's profit.

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