Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS3.5.2 Liability AccountsBalances on each liability account such as trade creditors and long termloans/debentures should be brought down in their respective ledgeraccounts. Each liability is either settled by the discontinuing businessor taken over by the new business.Where the liability is settled by the discontinuing business, the liabilityaccount is debited and cash/bank account credited. However, where theliability is taken over by the new business it becomes part of the purchaseconsideration and is treated as follows:Dr. Liability accountCr. New Company account3.5.3 Discount Received from CreditorsWhere the liability has been settled at less than the book value and thisis regarded as full and final settlement. It means discount has beenreceived from creditors. The accounting entries are:Dr. Liability accountCr. Realisation AccountILLUSTRAUSTRATION TION 3.1The illustration below shows clearly how the discount received fromcreditors is treated.The following balance sheets of two different companies were given asat 31 December 2004.ABC LTDBalance Sheet as at 31/12/04Fixed Assets N m mMotor Vehicles 40Plant and Equipment 60Furniture & Fittings 20 120Current AssetsStock 12.0Debtors 26.8Cash & Bank 9.248Current liabilities (creditors) (28)Net Current Assets 20Net Assets 14022