by A Deficiency Account is a statement that shows the amount of loss incurred by a company in its operations, which is not covered by its assets. In other words, it is a financial statement that records the amount by which the company’s liabilities exceed its assets. The Deficiency Account is prepared when a company is being wound up, and it is a part of the final accounts of the company.
The Deficiency Account is used to calculate the amount of money that the company’s shareholders will be required to contribute to meet the shortfall. This amount is known as the “Contributory” and is calculated based on the number of shares held by each shareholder.
The Deficiency Account is prepared in a similar format to the Statement of Affairs, with the liabilities listed first, followed by the assets. The difference between the two is the amount of the deficiency, which represents the amount by which the liabilities exceed the assets. The Deficiency Account is an important document in the winding up of a company, as it helps to determine the amount of money that the shareholders will be required to contribute to meet the company’s obligations.
Preparation of Deficiency Account
The preparation of a Deficiency Account involves the following steps:
- Ascertain the assets: The first step is to ascertain the total value of the company’s assets. This includes both tangible assets, such as property and equipment, as well as intangible assets, such as intellectual property and goodwill.
- Determine the liabilities: The next step is to determine the total amount of the company’s liabilities. This includes both current and long-term liabilities, such as accounts payable, loans, and mortgages.
- Calculate the deficiency: The deficiency is the amount by which the liabilities exceed the assets. This is calculated by subtracting the total value of the assets from the total amount of the liabilities.
- Prepare the Deficiency Account: The Deficiency Account is prepared in a similar format to the Statement of Affairs. The liabilities are listed first, followed by the assets, and the deficiency is shown as a negative figure. The format of the Deficiency Account may vary depending on the requirements of the specific jurisdiction.
- Calculate the contributory: The contributory is the amount of money that the shareholders will be required to contribute to meet the shortfall. This is calculated based on the number of shares held by each shareholder.
- Prepare the final accounts: The Deficiency Account is included in the final accounts of the company, which are prepared as part of the winding-up process. The final accounts also include the Statement of Affairs, the Liquidator’s Account, and the Capital Account.
| LIABILITIES | VALUE |
| Accounts Payable | $50,000 |
| Loans Payable | $100,000 |
| Taxes Payable | $25,000 |
| Accrued Expenses | $20,000 |
| Mortgage Payable | $150,000 |
| Total Liabilities | $345,000 |
| ASSETS | VALUE |
| Cash and Cash Equivalents | $5,000 |
| Accounts Receivable | $20,000 |
| Inventory | $40,000 |
| Plant and Machinery | $150,000 |
| Furniture and Fixtures | $15,000 |
| Total Assets | $230,000 |
| Deficiency | $115,000 |
| CONTRIBUTORY | VALUE |
| Shareholder A (10,000 shares) | $5,000 |
| Shareholder B (5,000 shares) | $2,500 |
| Shareholder C (3,000 shares) | $1,500 |
| Total Contributory | $9,000 |
The Deficiency Account table shows the total amount of liabilities and assets of the company, and the difference between them, which is the deficiency. The contributory table shows the amount of money each shareholder will be required to contribute based on their shareholding.
It’s important to note that the values in the table are for illustrative purposes only, and actual values will vary based on the specific circumstances of the company. The format of the Deficiency Account may also vary depending on the jurisdiction and requirements of the specific case.
