Medium Term Loan for Augmenting Working Capital

Introduction:
Working capital is the difference between current assets and current liabilities of a business. A business may require additional working capital to meet its day-to-day operational expenses, such as payment of wages, purchase of raw materials, and payment of bills. To meet these expenses, a business may obtain a medium-term loan from a bank.

Definition of Medium-term Loan:
A medium-term loan is a type of loan that is repaid over a period of 2-5 years. This type of loan is generally used for capital expenditures, such as the purchase of machinery or equipment, or for augmenting working capital.

Purpose of Medium-term Loan:
The purpose of obtaining a medium-term loan for augmenting working capital is to meet the short-term operational expenses of a business. It is a type of capital receipt that helps a business to maintain its cash flow and liquidity.

Impact on Financial Statements:
When a business obtains a medium-term loan for augmenting working capital, it is recorded as a capital receipt in the financial statements. This means that it does not affect the revenue of the business. However, the interest paid on the loan is recorded as a revenue expenditure, which reduces the profit of the business.

Conclusion:
In conclusion, a medium-term loan obtained from a bank for augmenting working capital is a type of capital receipt that helps a business to maintain its cash flow and liquidity. It is not a revenue expenditure, but the interest paid on the loan is recorded as a revenue expenditure in the financial statements.