Bank Guarantee is a promise from a Bank on behalf of a person that if a guaranteed person defaults on a specified contract or agreement, the bank will cover loss. Bank Guarantee is non fund based limit. Bank Guarantee is a contingent liability. Bank Guarantee only shown in notes to account of financial statements.
As per accounting standard 29 [AS-29] contingent liability means:
10.4 A contingent liability is:
(a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
or
(ii) a reliable estimate of the amount of the obligation cannot be made.
JOURNAL ENTRIES:
Guarantee is a contingent liability and contingent liability shown in notes of account only. For those who do not want to take risk of forget at the time of finalization of financial statements, I workout following solution / entries in books of account:
STEP –1 : CREATE SUB GROUP Create a “Contingent Liability” under the heading of Long Term Provisions:
STEP – 2 : CREATE LEDGERS: create following ledger for journal entry of bank guarantee:
BANK GUARANTEE BHARATIYA MAHILA BANK A/C – under the group of “Contingent Liability”
BG Make Money From Home Pvt Ltd A/c (To whom BG is given) – under the group of “Contingent Liability”
Bank Guarantee Margin A/c – under the group of non current assets “Long Term Loan and Advances”
Bank Guarantee Provision A/c – under the group of “ Contingent Liability”
STEP – 3 Journal Entries:
1. Entry for Opening of Bank Guarantee:
BG Margin A/c Dr 25,000.00
To Bank a/C Cr 25,000.00
(Being 25 % margin paid to bank for issue of BG of Rs.1,00, 000/- in favour of Make Money From Pvt Ltd )
2. Entry for payment of BG Charges
Bank Charges A/c Dr 2,000.00
To Bank A/C Cr 2,000.00
(Being 2% bank charges paid for opening of bank guarantee in favour of Make Money From Home)
3. Entry for handover of bank guarantee to concerned party
BG Make Money From Home Pvt Ltd Dr. 1,00,000.00
To BG Bharatiya Mahila Bank A/C Cr. 1,00,000.00
(Being bank guarantee handed over to party)
Trail position at the year end :
1. Both the ledger is grouped in same sub group, therefore, closing balance will be NIL no effect in financial statement;
2. You can observed following ledger in trail balance and you can mitigate risk to forget at the time of preparation of financial statement. Contingent Liability Credit 0 BG Make Money From Home Pvt Ltd 1.00,000.00 BG Bharatiya Mahila Bank A/C Cr. 1,00,000.00
4. Receipt of Bank and no invocation:
BG Bharatiya Mahila Bank A/C Dr. 1,00,000.00
To BG Make Money From Home Pvt Ltd Cr. 1,00,000.00
(Being tenure of bank guarantee is expired or bank guarantee received in original)
Bank A/c Dr 25,000.00
To BG Margin A/c Cr 25,000.00
(Being Margin released by bank)
5. Entry when guarantee invoked
Profit & Loss A/c Dr 1,00,000.00
To BG Provision Cr 1,00,000.00
(Being provision made against given guarantee)
BG Make Money From Home Pvt Ltd Dr. 1,00,000.00
To BG Margin A/c Cr 25,000.00
To Bank A/c Cr 75,000.00
(Being BG no .. invoked by party)
BG Provision Cr 1,00,000.00
To BG Make Money From Home Pvt Ltd Cr. 1,00,000.00
(Being BG no .. invoked and provision transferred to party account)
BG Bharatiya Mahila Bank A/C Dr. 1,00,000.00
To BG Make Money From Home Pvt Ltd Cr. 1,00,000.00
(Being bank guarantee invoked and cancelled by bank)