Medium term loan obtained from bank for augmenting working capital is:...
Receipts which are obtained in course of normal business activities are revenue receipts and all receipts other than revenue receipts are capital receipts. Securing of loan is not a normal business activity and hence medium term loan taken from bank for augmenting working capital is a capital receipt.
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Medium term loan obtained from bank for augmenting working capital is:...
Capital Receipt:
Medium-term loans obtained from a bank for augmenting working capital are considered as capital receipts. Here's why:
Working Capital Augmentation:
- The loan is obtained to supplement the working capital of the business, which is essential for day-to-day operations and maintaining liquidity.
- Working capital loans are used for funding inventory, accounts receivable, and other short-term operational needs.
Capital Expenditure:
- The loan amount is utilized for capital expenditure purposes, such as purchasing new machinery, expanding production capacity, or acquiring long-term assets.
- Unlike revenue expenditure which is incurred for day-to-day expenses, capital expenditure is aimed at enhancing the business's capabilities for long-term growth.
Long-term Financial Planning:
- Medium-term loans are typically repaid over a longer period, making them a part of the business's long-term financial planning.
- The funds obtained through such loans are injected into the business for sustained growth and expansion.
Balance Sheet Impact:
- As a capital receipt, the loan will reflect on the liabilities side of the balance sheet, representing the funds borrowed by the business for capital investment.
- This distinguishes it from revenue receipts, which are generated from the core operations of the business.
In conclusion, a medium-term loan obtained from a bank for augmenting working capital is classified as a capital receipt due to its utilization for capital expenditure purposes and its impact on the long-term financial health of the business.
Medium term loan obtained from bank for augmenting working capital is:...
Sanju Kumar
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