Current Liabilities De-mystified!!!
Author: Giridhar Narayanan
2nd July, 2019, Tuesday: Picking up further from where we left off (https://cashcowconsulting.in/balance-sheet/), let’s dive right into the current liabilities section of the balance sheet. Current liabilities represent all short term sources for the business. Let us explore each one of them in detail:
|Sources of Funds (Liabilities)|
|Short Term Sources (Current Liabilities)||Amount|
|Working Capital Finance From Bank|
|Creditors (for goods and expenses)|
|Advance from Customers|
|Provision for taxation|
|Other Statutory Liabilities|
|Total Short Term Sources (A)|
Working Capital Finance from Bank:
Working capital as you might have been told/heard is the funding required to keep the day to day operations of the firm running.
Now the question arises as to why is funding required for everyday business. The answer to that is that the funds you have pumped into business (your capital) is tied up in receivables (debtors) and/or stock and any other current asset.
Let me elaborate on it and take it a bit further. Any firm that does business will be booking sales and if that particular sale is on credit of say 2 months to your customer, you will be realising the money from that sale from that particular customer only after 2 months. For example, assume that the business has generated sales of Rs.100 in the month of April, which will be realised in the month of June ( as there is a 2 month credit). In this scenario, the business needs to pay its day to day operational expenses like salary, rent , electricity etc for the 2 months (April and May) where the business’s capital is stuck with the customer in the form of receivables and would require financing for this interim period. This is working capital and bank’s provide finance for the same at an agreed upon interest.
Although from an organisation standpoint , the funds invested in entire current assets (receivables, stock, statutory receivable, advance tax paid etc) form a part of the working capital requirement, Bank’s generally only finance funds that are tied up in the form of receivables(debtors) and stock (inventory). In some cases, Bank’s can fund other current assets, like the recent example of some bank’s rolling out a special scheme towards funding GST receivable for Exporter’s. But this is an exception rather than the norm.
Creditor’s is the accounting terminology for suppliers who are yet to be paid by you. Creditors can further be classified as creditors for goods or creditors for expenses, depending upon what they are supplying or the service they are dispensing. They act as a source of working capital finance for the business.
For example, if the business has purchased stock (be it Raw Material, Consumables, Packing Material etc) worth Rs.100 on credit, the supplier finance’s the purchase of stock thereby replacing the business’s capital to be allocated towards the same, thus acting as a source of short term funding for the business.
Advance from customers:
As the name suggests, this represents the advance you collect from your customers before starting the job in some cases, but most definitely before raising a sales invoice in favour of your customer. Effectively your customer funds a part of your job requirement and thus acts as a source of short term funding. Upon job completion and receipt of payment from the customer, the advance is adjusted against the total invoice amount receivable from the client.
Provision for Taxation:
This represents the outstanding income tax that needs to be paid to the government as on the particular date when the balance sheet is prepared.
Other Statutory Liabilities:
This is similar to the Provision for Taxation except that this represents all the other statutory liabilities like GST, Provident Fund (PF), ESIC etc that needs to be paid to the government on the particular date that is balance sheet is prepared on.
This represents any other short terms source of funding or all other short term payables apart from the ones mentioned above that is outstanding as on the date the balance sheet is prepared.