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Correction of negative cash???

Nitin Singhal (Gaining knowledge...) (320 Points)

01 December 2012

Hello Friends,

I was inspecting books of one of my clients and came to know of this problem:

The client is sole proprietor and has negative cash in first three months of the year 2012-13 (i.e. April, May, June). Now, if anyone can suggest what are the options available to client to make that cash positive so that if case bumps up in scrutiny it does not become more problematic.

Please provide solution..

Thanks...

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17 Replies

V Vara Prasad (Chartered Accountant) (212 Points)
Replied 01 December 2012

First verify whether negative cash balance is continuous for 3 months

then what is the negative cash balance amount

If it is not continuous then adjust bills alternatively

If it is continuous then make an entry of receiving cash from any one

But first tell me the amount and continuous or not

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 01 December 2012

Yes, the negative cash balance is for 3 continuous months. The amount is around 6 lakhs. How can I show an entry taking cash from anyone? That would be disallowed or chargeable under the Income Tax Act.

V Vara Prasad (Chartered Accountant) (212 Points)
Replied 01 December 2012

it is proprietorship concern and it is a tax audit case - right

I think if the proprieor had enough cash in his in his books then made entry as he introduced cash as capital in the firm

I will check and tell if there are any other options

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 02 December 2012

If the proprietor had enough balance (white cash) in his books then there would not have any problem of negative cash because in proprietorship everything whether personal or related to business is included.

So, the entry suggested by you relating to introduction of capital is not feasible in this case.

Please suggest if there are any other options available.

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 03 December 2012

Cannot even a single person provide solution for this query??

V Vara Prasad (Chartered Accountant) (212 Points)
Replied 03 December 2012

The business and proprietor are same in proprietorship firm but do u prepare capital A/c for the firm and individual also

For the business capital A/s u prepare business but in personal capital A/c u will include other income also

V Vara Prasad (Chartered Accountant) (212 Points)
Replied 03 December 2012

U had five heads of income and proprietor business books gives you the income of only one head Profits & gains from business or profession only

His other heads of income are his other incomes not reflected in firms books

There are two capital A/c one is personal and other is firm capital A/c ok

Make an entry of loans received in personal capital A/c and introduce that money as capital in firms goods

ur problem is solved

I think u get my point otherwise reply me

Nithin Chettoor (Assistant Manager) (388 Points)
Replied 03 December 2012

1). Introduction of capital by the proprietor

2). Book receipt of cash from already received debtors on a proportionate basis so that it wont cross 20K a day

3). Find out cash expenses where it has vouchers in the form of invoices(and not receipts) and make those expenses to credit and pay the amount when the cash balance turns positive.

4). Account certain advances from the customers which are subsequently received actually and account the bills against such advances in the subsequent period.

These are certain safe methods to do!! :-)

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 05 December 2012

@ V Vara Prasad: I got your point. But the problem still remains the same. You say "make an entry of Loan received in Personal Capital Account and introduce that in firm as capital".

But my cash is negative in April to June -2012. So I need cash in those months. And if I take loan in cash then section 269SS and 269T become applicable. And if I take loan through Cheque that would appear in current date and not back date so those months' cash will still be negative.

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 05 December 2012

@ Nithin: Your first three have already been applied and only after that cash balance is negative.

However, I could not understand your point 4. I shall be highly thankful if you can please elaborate this point.

Thanks

Nithin Chettoor (Assistant Manager) (388 Points)
Replied 05 December 2012

U cant take loans/deposits from any person more than 20K in cash.. hence account receipt of advances in the nature of trade advances from certain customers. you may select the customers which have really paid the amount subsequently. Then you can account the bills/sales to that customer against the advances and equalise the ledger. In short, make the credit sales and receipt to sales against advances.

Nitin Singhal (Gaining knowledge...) (320 Points)
Replied 05 December 2012

@ Nithin: I got your point. But the problem in this method is that the VAT Returns for the quarter have already been filed and if we do change the entries as per your suggestion then we would have to revise the VAT returns as well and that would become a problematic situation.

Still, Thanks for your suggestion and I am looking for method if I can apply your suggestion.

And Please Let me know if you find any other method to correct the cash.

Nithin Chettoor (Assistant Manager) (388 Points)
Replied 05 December 2012

You neednt change the sales entries. Let it remain the same way as it. Just adjust the debtors ledger. Account the receipts as advance during the month you have negative cash. and optimize the balance.