OpenTuition | ACCA | CIMA
Free ACCA and CIMA on line courses | Free ACCA, CIMA, FIA Notes, Lectures, Tests and Forums
Get yours with OpenTuition discount code >>
ACCA Financial Management lectures Download FM notes
Sign up with YouTube premium to watch our lectures Ad-free and download them to watch offline.
Specially for OpenTuition students
June 13, 2021 at 6:03 am
Sir, I am confused about 100 overdrawn in the stage 2 in your example. The basic balance is assets = liabilities + equity. Therefore, I understand that 100 in overdrawn (liabilities) would make the balance of SoFP. However, in general, I usually read a couple of examples and it has double-entry accounting such as Dr Cash and Cr Overdraft. For that reason, I haven’t understood the 100 overdrawn in your example properly to make that balance (like Cr 100 overdrawn and what is the Dr ?). Can you explain more details about this or can you give a process for an example? Thank you.
John Moffat says
June 13, 2021 at 8:38 am
Double entries are irrelevant for Paper FM – they are all examined in Paper FA. However there is no such entry as Dr Cash Cr Overdraft.
If, for example, they buy more inventory, the entry is Dr Purchases Cr Cash. An overdraft is a credit balance on the cash account.
June 13, 2021 at 6:14 pm
Sir. If I consider the accounting entry, I think the process when buying inventory with bank overdraft might be like this: 1. Dr Cash Cr Bank Overdraft -> 2. Dr Purchases Dr Cash
In this process, I am understanding that when cash comes to zero and a company might expect more money to charge for inventory (example). Therefore, the cash is raised in Debit and Bank Overdraft is also a Credit right? When the company has money, therefore, it will buy Inventory (Dr Purchase or Dr Inventory) and Cr Cash to make the balance. Do you think my example is correct?
However, I also understand your example because the nature of bank overdraft is when money comes to zero, the company can extend the credit with the bank via contract which might have between company and the bank before. Therefore, when money comes to zero and the company needs money simultaneously for purchasing inventory, it will ignore the entry Dr Cash Cr Bank Overdraft and come to Dr Purchases and Cr Cash right away (cash in this situation is like the negative balance or overdraft).
If I were wrong, could you explain for me more details? Thank you sir.
June 14, 2021 at 4:02 pm
I repeat double entry bookkeeping is not relevant for Paper FM. The cash account refers to cash at the bank (if they do have ‘loose’ cash then this is recorded in the petty cash account. Companies will not pay for inventory with ‘loose cash’ they will pay through the bank and the entry is Dr Purchases and Cr Cash. If the cash is a credit balance then it means they are overdrawn at the bank.
If you have more problems relating to double entry then please watch the Paper FA free lectures.
June 15, 2021 at 2:05 am
Thank you Sir.
August 26, 2018 at 7:06 pm
how can I download your videos?
August 27, 2018 at 8:27 am
The videos can only be watched online – it is the only way we can keep this website free of charge.
August 27, 2018 at 12:42 pm
Ok then. Thank you.
August 27, 2018 at 7:24 pm
You are welcome 🙂
April 11, 2018 at 3:10 am
Sir what is happening to the cash of 50 in that example? why wont it double as well?
April 11, 2018 at 7:38 am
How can it double unless they raise more finance – it would have to come from somewhere!!
That is the whole point about over-trading, unless they raise more long-term finance to cover the need for extra working capital, then they will be forced into using short-term finance i.e. going overdrawn.
September 12, 2018 at 6:14 pm
Why don’t we keep it at 50 then just overdraft 50.
September 13, 2018 at 8:06 am
But read my previous reply!!
Going overdrawn by 50 is again being forced into using short-term finance because they had not planned ahead.
September 13, 2018 at 4:52 pm
Thank you, sir
September 14, 2018 at 8:09 am
March 13, 2018 at 1:05 am
What would you consider to be a high working capital?
March 13, 2018 at 8:08 am
You cannot look at the level of working capital on its own and say that it is too high or too low – it depends on the type of business and the size of the company. You can only comment by comparing it with similar companies, or with previous years.
March 13, 2018 at 11:53 pm
Noted with many thanks.
March 14, 2018 at 7:10 am
December 28, 2017 at 8:15 pm
why would overcapitalization be a problem?
December 29, 2017 at 7:10 am
Because working capital would be higher than needed. Working capital does not earn money for the business, but because of having raised more long-term capital to finance it they will be paying more interest than needed.
December 30, 2017 at 10:57 am
I understand now. Thank you for your reply.
July 7, 2017 at 7:39 am
There would be no point in doubling the working capital if they were not doubling the non-current assets – it would be more sensible to do it in proportion.
However it israthler academic in that you will not be asked calculations on this – it is more understanding the potential problem of over-trading.
July 7, 2017 at 12:12 pm
Thanks for the reply (Y)
July 7, 2017 at 12:49 pm
July 6, 2017 at 8:01 pm
If the Company not been able to generate an additional investment of $700, instead it can only generate an additional investment of $500. In such case is it better to add $300 to Non current assets, so NCA will be $800(500+300) and long term capital will be $1200(700+500) and that leaves the company with a working capital of $400.
Is it better that way, rather than investing the entire $500 into NCA
You must be logged in to post a comment.