In a series of posting important banking concepts for students for non-commerce or banking background, today I am sharing Some important commercial terms from management accounting.
Ex.: Company A has many receivables, say Rs.50,000, the due dates are 3-4 months from today. Thus the Company will receive the money 3-4 months later. If the Company wants the money now, it will go to a ‘factoring’ firm, say Firm Z and sell all it Receivables at a discount, say for Rs.45,000 and receives cash immediately instead of waiting for 3-4 months.
Thus, company A sells it’s receivables worth Rs.50,000 to Firm Z for Rs.45,000.
When the due date comes, then Firm Z will receive aggregate of Rs.50,000, from the debtors. Rs.5000 is Firm Z’s operating income and Company’s A’s compensation paid for receiving the money immediately.
Shortage of working capital can be very harmful for a business – payment of salaries, payment to creditors, purchases, and payment of obligations such as telephone bills/electricity bills etc. are managed from the ‘working capital’.
Thus you can connect, factoring and working capital and say, when a company needs funds for its working capital requirements, it factors off its receivables.
When you sell goods on credit – you’ve sold the goods but will receive the payment after 1 month. This situation is a ‘bills receivable’ and the purchaser of your goods is your ‘debtor’ from whom you are to receive money.
If you have purchased goods on credit – you’ve purchased the goods but will make the payment after 1 month (credit card transaction are most commonly seen!). This situation is a ‘bills payable’ for you, and the seller of your goods is your ‘creditor’ to whom you are to pay the money.
These assets directly or indirectly help in carrying on the business; hence they are long term assets not planned on being sold in the daily course of business.
Tyres and other car spare part kept in a car tyre’s shop is their asset – as they will receive money on selling them. But they are ‘current assets’ as they are kept with the intention of making a sale soon and receive money in return.
Important to note: Bills Receivable and Debtors are also current asset as they are generated in the normal course of business and is not intended to be held for a long time.
It can be equity capital from issue of equity shares as well as preference capital from issue of preference shares.
That is all for today…have a good one!
1. Factoring:
Factoring is an arrangement in which short term domestic receivables/Bills Receivables are sold to a company known as ‘factor’. Thereupon, it is the factor who is now the holder of the bills receivables and will receive the payment on due date from the party.Ex.: Company A has many receivables, say Rs.50,000, the due dates are 3-4 months from today. Thus the Company will receive the money 3-4 months later. If the Company wants the money now, it will go to a ‘factoring’ firm, say Firm Z and sell all it Receivables at a discount, say for Rs.45,000 and receives cash immediately instead of waiting for 3-4 months.
Thus, company A sells it’s receivables worth Rs.50,000 to Firm Z for Rs.45,000.
When the due date comes, then Firm Z will receive aggregate of Rs.50,000, from the debtors. Rs.5000 is Firm Z’s operating income and Company’s A’s compensation paid for receiving the money immediately.
2. Working Capital
Working Capital is the amount of funds required to run the day to day business of any organization. Working capital represents the ‘cash’ element which is required to run the daily business activities.Shortage of working capital can be very harmful for a business – payment of salaries, payment to creditors, purchases, and payment of obligations such as telephone bills/electricity bills etc. are managed from the ‘working capital’.
Thus you can connect, factoring and working capital and say, when a company needs funds for its working capital requirements, it factors off its receivables.
3. Bills Receivables:
Bills Receivables are payments receivable to a company. They are a company’s asset as money is receivable by them.When you sell goods on credit – you’ve sold the goods but will receive the payment after 1 month. This situation is a ‘bills receivable’ and the purchaser of your goods is your ‘debtor’ from whom you are to receive money.
4. Bills Payable :
Bills Payable are payments to be made by a company. They are a company’s liabilities as money is payable by them.If you have purchased goods on credit – you’ve purchased the goods but will make the payment after 1 month (credit card transaction are most commonly seen!). This situation is a ‘bills payable’ for you, and the seller of your goods is your ‘creditor’ to whom you are to pay the money.
5. Fixed Assets:
Fixed Assets are the fans/tables/chairs/buildings/lands/plants and machineries/vehicles etc. Fixed assets are those assets which are owned by an entity and used by it to carry on its business. These assets are depreciable because they are used on regular basis.These assets directly or indirectly help in carrying on the business; hence they are long term assets not planned on being sold in the daily course of business.
6. Current Assets:
Current Assets are the business – they are the stocks of finished goods (sarees/ biscuit packets/ soap bars/ pepsi bottles etc.) or WIP (work-in-progress, such as have finished saree with embroidery work..), inventories etc. in which the business deals in.Tyres and other car spare part kept in a car tyre’s shop is their asset – as they will receive money on selling them. But they are ‘current assets’ as they are kept with the intention of making a sale soon and receive money in return.
Important to note: Bills Receivable and Debtors are also current asset as they are generated in the normal course of business and is not intended to be held for a long time.
7. Current Liabilities:
Current Liabilities includes Bills Payables and Creditors and any other obligation where payment is to be made within one year!8. Investments:
Investments are investments – just like how you and I would make, in shares/property etc. These are also assets of a company.9. Capital
Capital is generally referred to the paid up capital of a company. That is, the capital raised from the public, by issuing of the company’s shares.It can be equity capital from issue of equity shares as well as preference capital from issue of preference shares.
10. Authorised Capital:
Authorised Capital is the maximum capital a company is authorized to raise from the public. It is also the ‘registered capital’; a company cannot raise money from the public through issue of its share more than this amount. That would run afoul with the authorities!That is all for today…have a good one!
