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Use of cash credit

Naina (CA Student) (477 Points)

30 October 2011

A firm, manufacturing readymade garments, has taken C.C. limit of Rs. 50 lacs. It has purchased a car (fixed asset) for Rs. 10 lacs. Can C.C. A/c be used for making payment for the car?

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4 Replies

darpan chheda (Accounts Manager) (90 Points)
Replied 02 November 2011

Hi Naina,

CC limit can NOT be utilized for acquisition of a FIXED ASSET.... It will be a case of diversion of funds, if fixed assets are bought from the Cash credit funds... Cash credit is given for working capital requirements of the company & should be utilized strictly for that purpose only...

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Jayam Ramesh K C (Group Chiefr Accountant) (99 Points)
Replied 01 March 2013

Hi Friends

I differ here. A firm earning profit can buy car or van for business purposes. Thre is no diversion of friends. It all depends what is size of profit earned by the firm. Today in 2013 no business can be run without a car ora van. Also it depends on the bank, the firm operates.Generally all conservative disapproves. But at the end of the day all depends on the relationship and accounting discipline.

( Jayam Ramesh K C)

Nakul Sharma (CA FINAL) (35 Points)
Replied 12 March 2013

You should note that, above amount will attract provision xvii of CARO 2003 which states as under, and the auditor will have to appropriately qualify it : whether the funds raised on short-term basis have been used for long-term investment; If yes, the nature and amount is to be indicated

because (a) The principles of financial management suggest that the long-term assets of an enterprise should be financed from long-term funds. The genesis of the principle is that if funds raised from short-term sources are used for long-term investments, the enterprise can face liquidity problems as soon as the short-term sources fall due for payment. However, an exception to the principle would be the situation where an enterprise is able to generate sufficient funds

from long-term sources either through its operations or other means to meet the working capital requirements arising from the event of short-term sources falling due for payment. The application of the principle is considered to be of utmost importance for the financial health of an enterprise. The clause requires the auditor to comment whether the funds raised on short-term basis have been used for long-term investment, so that the readers can assess whether the company has followed the above-mentioned principle of financial management. Examples of use of funds raised on short-term basis and used for long-term purposes would include investing money from overdraft facilities in long-term investments in shares of subsidiaries/associates/joint ventures or investing money raised from public deposits due for repayment in three years in a project whose pay back period is ten years. Further, cash from operating activities represent a long term source of funds.

Ankush Patil (Accountant) (22 Points)
Replied 18 August 2018

I am accountatnt in private company. I have confused with Bank Term about Cash credit Acc. - minimum 40% utilisation must be required for Quarterly on C.C. limit.

But, we used cash credit a/c. only 3 or 4 months for year. My question is can I transfer requied amount for minimum 40% from c.c. acc. to current acc. for avoid bank charges.