Classification of liabilities and assets: The liabilities side of the balance sheet can be classifi

Classification of liabilities and assets: The liabilities side of the balance sheet can be classified into long term liabilities and short term liabilities. The long term liabilities can be termed as long term sources; whereas the short term liabilities are termed as short term sources or current liabilities. The assets side of the balance sheet can be classified into long term assets and short term assets. The long term assets can be termed as long term applications or long term uses; whereas the short term assets are termed as short term applications or short term uses or current assets. Current liabilities: The following are termed as current liabilities: ✅ 01. Short term borrowings(including bills purchased and discounted) from banks or others ✅ 02. Unsecured loans ✅ 03. Public deposits maturing within a period of one year ✅ 04. Sundry Creditors (trade) for raw materials and consumable stores and spares ✅ 05. Interest and other charges accrued but not due for payment ✅ 06. Advances/progress payments from customers ✅ 07. Deposits from dealers, selling agents etc ✅ 08. Installments of debentures, redeemable preference shares and long term deposits payable within one year; ✅ 09. Statutory liabilities namely; Provident fund dues; Provision for taxation; Sales tax excise etc; Obligation towards workers considered as statutory; others ✅ 10. Miscellaneous current assets comprising of – dividends, liabilities for expenses, gratuity payable within a period of one year, other provisions and any other payments due within a period of twelve months Current assets: The following are termed as current assets: ✅ 01. Cash and bank balance; ✅ 02. Investments namely; Government and other trustee securities (other than for long term purposes – viz., sinking fund, gratuity fund etc., Fixed deposits with banks ✅ 03. Receivables arising out of sales other than deferred receivables (including bills purchased and discounted by the bankers) ✅ 04. Instalments of deferred receivables due within a period of one year; ✅ 05. Raw materials and components used in the process of manufacture including those in transit ✅ 06. Stock in process including semi finished goods; ✅ 07. Finished goods including goods in transit; ✅ 08. Other consumable spares; ✅ 09. Advance payment for tax; ✅ 10. Prepaid expenses; ✅ 11. Advances for purchase of raw materials, components and consumable stores; ✅ 12. Monies receivable from contracted sale of fixed assets during the next months Notes on current assets and current liabilities: ✅ 01. The concept of current liabilities would include estimated or accrued amount, which are anticipated to cover expenditure within the year for known obligations viz., the amount of which can be determined approximately- e.g. provisions, accrued bonus payments etc., ✅ 02. In cases, where specific provisions have not been made for these liabilities and will be eventually paid out of general reserves, estimated and should be shown as current liabilities; ✅ 03. Investment in shares and advances to other firms and public companies connected with the business of the borrowing firm should be excluded for current assets; ✅ 04. Dead inventory; i.e. slow moving or absolute items should not be classified as current assets. ✅ 05. Amounts representing inter-company transactions should be treated as current only after examining the nature of the transactions and merits of the case. For e.g. advance paid to suppliers for a period more the normal trade practice, inspite of any other considerations such as regular and assured supply should not be considered as current. ✅ 06. Advance/progress payments from customers – These deposits are due to be classified as current liabilities. Where deposits are required in terms of regulations framed by the government, to be invested in a specific manner (For e.g. advances for booking vehicles) the benefit of the netting may be allowed to the extent of such investments in approved securities and only the balance amount need to be classified as current liabilities; ✅ 07. Where on account of different accounting procedure, progress payments are shown on the liabilities side without deduction from work in progress, the banks may set off the progress payments against the work in progress. The advance payments received are also adjusted progressively from the value of the work completed as agreed in the contract. Outstanding advance payments are to be reckoned as current liabilities, or otherwise, depending upon whether they are adjustable within a year or later; ✅ 08. The deposits from dealers, selling agents etc – (Item No: 7 under current liabilities) – These deposits may be treated as term liabilities irrespective of their tenure, if such deposits are accepted to be repayable only when the dealership or agency is terminated after due verification by the banks; The deposits which do not satisfy the above conditions should be continued to be classified as current liabilities. The security deposit/tender deposit may be classified as non current assets irrespective of whether they mature within the normal operating cycle of one year or not; ✅ 09. Provision for taxation: (Item No: 9(b) under current liabilities) – Netting of tax provisions and advance tax paid (vide item No: 9 of current assets) may be effected for all the years uniformly and as such for the current year also the advance tax paid can be set off against the provisions, if any, made for that year; ✅ 10. Sales tax, excise duty etc., (Item No: 9-c under current liabilities) Disputed excise liabilities shown as contingent liabilities or by way of note to the balance sheet need not be treated as current liabilities for calculating permissible bank finance; unless it has been collected or provided for in the accounts of the borrower; Provision for disputed excise duty should be classified as current liabilities unless the amount is payable in installments spread over a period of one year as per the orders of the competent authority like the excise department or in terms of directions of a competent court. In such cases, if the installments payable after one year are classified as long term liability no objection letter/certificate may be taken to such classification; ✅ 11. Where the provisions made for disputed excise duty, is invested separately, say, in fixed deposits with banks, such provision may be set off against the relative investment. ✅ 12. Disputed liabilities in respect of income tax, customs and electricity charges need not be treated as current liability for the purpose of computation of maximum permissible bank finance, except to the extent provided for in the books of the borrower. ✅ 13. Receivables arising out of sales other than deferred receivable (included bills purchased and discounted by the bankers (Item 3 under current assets) Export receivables may be included in total current assets for arriving at the maximum permissible bank finance, but the minimum stipulated net working capital (i.e. 25% of total current assets under second method of lending) may be reckoned after excluding the quantum of export receivables from the total current assets; Similarly, receivables arising out of domestic/in land sales, by drawing bills of exchange even with recourse, negotiated under usance letters of credit (whether revocable or irrevocable) is to be excluded for building up of current assets, for the limited purpose of reckoning the minimum prescribed net working capital required to be maintained under second method of lending; ✅ 14. Other consumable spares (item No: 8 under current liabilities): Proper levels of spares on the basis of past experience, but not exceeding twelve months consumption for imported items and nine months consumption for indigenous items may be treated as current assets for the purpose of working capital requirements; ✅ 15. All short term/temporary investments in money market instruments , commercial paper, certificate of deposits etc., can be considered as current assets. However, other investments like inter corporate deposits, investments in listed shares and debentures including investment subsidiaries and associates are to be considered as non current assets ✅ 16. Cash margin for non fund based limits like letter of credits/guarantees may be treated as part of current assets for the purpose of maximum permissible bank finance and current ratio. However, such margin held for deferred payment guarantee should be considered as non current assets; ✅ 17. All term loan installments, fixed deposits, debentures etc repayable within next twelve months should be considered as current liabilities for computation of current ratio and maximum permissible bank finance; ✅ 18. Inter corporate deposits taken are to be treated as current liabilities; ✅ 19. The above list of current liabilities and current assets is only illustrative and not exhaustive;