Accountingg for working capital diversion

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Querist : Anonymous

Querist : Anonymous (Querist)

27 November 2010 WORKING CAPITAL DIVERSION IS USING SHORT TERM SOURCE FOR LONG TERM PURPOSE.THE FINAL RESULTS IS THAT THE UNIT BECOMES SICK AND THE BANK LOAN BECOMES NPA. OTHERWISE,THE CC LIMITS DIVERTED FOR LONG TERM PURPOSE SHOULD HAVE BEEN BROUHT IN BY THE BORROWER.THIS TRANSACTION IS NOT BEING ACCOUNTED FOR AND NOT REFLECTING IN THE BALANCE SHEET AS THE AMOUNT OF CC LIMITS USED BY THE BORROWER FOR LONG TERM PURPOSE.AS A RESULT, THE USER OF THE BALANCE SHEET IS GIVEN WRONG IMPRESSION. WHY THE WORKING CAPITAL DIVERSION SHOULD NOT BE BROUGHT TO THE BORROWER'S BALNCE SHEET? SO THAT FURTHER RISE IN BANKS NPA CAN BE PROTECTED.

Ramasubbu K

Ramasubbu K (Expert)
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27 November 2010 Even now, it can be inferred from the cash flow statements. CFS clearly indicates the short term and long sources and short term and long term uses. If there is a mismatch between sources and uses and respective term, it implies the working capital diversion.

Querist : Anonymous

Querist : Anonymous (Querist)

02 December 2010 Dear Sir,
Thank you for your openion. When we can bring the amount diverted, transaction wise, the moment it takes place in the books of accounts,where is the need to wait till the year is completed and the balnce sheetis signed by the auditor to have the amount diverted from the cash flow statement.To day there is a transaction of amount paid for civilworks from cc limits.The borrower should never use the cc limits meant for working capital for long term use. The transaction is capitalised by debiting the asset a\c and crediting the cc a\c. When you know that amount should have been brought in by the borrower, why the working capital diverted a\c should not be credited by transferring the amount from cc a\c.Now , the balance shet reflects what is the working capital diverted by the borrower. And one can have the statement of working capital diverted on any day and at any time. This information will be helpful to the banker how much cc limits are diverted sothat bank can control the a\c, asset would not become NPA and the unit becoming sick does not arise.
with regards
(KOTTE MURALI KRISHNA)

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