Insolvency Of One Party

              Insolvency Of One Party

When a person or a party is declared by a court as insolvent or bankrupt he is considered to be unable to pay his liabilities. It means, that bills accepted by him will be naturally dishonoured. Therefore, when it is known that a person has become insolvent, entry for dishonour of the bill should be passed both in the books of the drawer and the acceptor (insolvent party).

When a person becomes insolvent, his private property, if he has any, is sold by a liquidator appointed by the court. Something may be received from his estate. Thus after passing entries for dishonour, we should prepare acceptor's account in the books of the creditors (drawer).

The acceptor's account in the books of the drawer will disclose the net amount due from him. Generally the amount received from the estate of insolvent party is less than the amount due from him. The unsatisfied balance is treated as bad debts and debited to "bad debts" account in the books of the drawer and credited to "Deficiency account" in the books of the drawee.

On the inslovency of the drawee , the following entries are passed in the both parties:

In Drawer's Books:

(a) Entry for dishonour in usual manner.
(b) Cash A/c                 {with actual amount receive}
      Bad debts A/c         {unsatisfied amount}
      
              Drawee's A/c   {full amount}
Final dividend received and the balance treated as bad debts.

In Drawee's books:

(a) Entry for dishonour in usual way.
(b) Drawee's A/c            {full amount}
            Cash A/c             {with actual amount paid}
            Deficiency A/c    {with amount un paid}
Final claim paid to the creditor.