Meaning and Accounting Treatment for Chit Fund.

Updated: Jun 20

Meaning of Chit Fund:


Chit Funds are finance saving schemes in India. A Chit Funds are good for saving money. Chit industry is more famous because it runs without any security being taken and runs mostly on trust. A Chit Fund is a financial instrument. Perception of chit fund varies from person to person. For one set of people, it is a money deposit scheme, a saving cum investment scheme. For another set of people, it is a loan or credit scheme.


Accounting Treatment for Chit Funds.


Example: One chit fund start with 10 members with a monthly contribution of Rs.10,000 per month.10 people x Rs 10,000 = 1 lakh The amount collected from all member in a group called as pot. Once the amount is collected it is placed for the auction among subscribers. The subscriber who agrees to take the lowest amount will get the prize. Suppose for the first month one subscriber (Murali) bid lowest say 75% of pot amount. This means Rs.75,000/- (75% of pot amount) will be given to him as a prize. Suppose 10% commission is charged by Foreman, total of Rs.10,000/- (1,00,000*10%) will be paid to him. Remaining amount of Rs.15000/- (1,00,000 - 75,000 - 10,000) will be distributed among other subscribers. All remaining subscribers get Rs.1,500 each and it is called 'Rebate or discount received'. So, effective contribution for the first month would be Rs.8,500/-(10,000-1,500) for every subscriber. 


Entries likely to be passed in Chit Company books:


1. When the amounts received from the chit members


10 Chit Subscribers Dr 85,000/-

To Chit Control a/c 85,000/-


Bank a/c Dr 85,000/-

To 10 Chit Subscribers 85,000/-

2. Foreman Commission & Pot payable to chit subscriber


Chit control a/c Dr 85,000/-

To Foreman commission a/c 10,000/-

To Murali (Chit subscriber) 75,000/-


Murali (Chit subscriber) Dr 75,000/-

To Bank a/c 75,000/-


The same entries needs to be passed for all the 10 auctions to be conducted. Necessary control ledgers can be created depends on how big the organisation and levels of controls required.


Note:

1. The above entries passed assuming foreman commission collected from each member. But in common world foreman commission will be collected from only one person each time when auction conducted i.e from the Bid Winner. And the entries will be changed accordingly to requirement.

2. Bank received from chit winner passed separately, but amount will be given to bid winner after adjusting his installment.


Entries likely to be passed in Chit Subscriber books:


1. When the amounts paid as contribution to the foreman and recognizing the Rebate amount as income in the books.


Chit Fund a/c Dr 10,000/-

To Bank a/c 8,500/-

To Rebate a/c 1,500/-


The above entry to be passed each time auction conducted.


2. When participated in auction and won the bid.


Bank a/c Dr 75,000/-

Rebate a/c Dr 25,000/-

To Chit Fund a/c 1,00,000/-


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