y we deduct bank o.d. from current liab. while calculating absolute liquid liab.pls explain
3 Replies
CA.kaya
(Chartered accountant)
(3990 Points)
Replied 27 August 2009
we dont take stock while calculating liquid ratio(quick ratio). and o/d is depend on stock . so i think for this ,its not concedered in the calculation of liquid ratio
Max Payne
(employed)
(2574 Points)
Replied 27 August 2009
@ Kaya, Almost there.
Let me just go just a little deeper. Normally Bank overdraft is the source of finance for the business man's stock or inventory. (You can see that bank gives OD, and the stock is the bank's primary security. Banks insist on monthly stock statements from people availing OD)
The production cost has been blocked in inventory. Now we are removing stock from liquid assets since there is no guarantee of the stock being converted in cash. Hence it is to remove the matching liability of the asset that we do not consider the OD.
Also in practical situations, there is no obligation/pressure to make the OD reach zero level. Banks provide the OD as long as u can meet their charges and maintain your current assets/inventory. The OD normally remains at the same level at year beginning and year end in the case of going concern entities. Hence, it does not merge that easily in to the concept of QUICK liability.
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