Question

In: Finance

Discuss the topic of Spontaneous Funds (SF). What are they, where do they come from, and...

Discuss the topic of Spontaneous Funds (SF). What are they, where do they come from, and can a firm create more SF if it wants too, if so, how? Give some examples and provide at least one accounting entry that recognizes the booking of spontaneous funds.

Solutions

Expert Solution

Spontaneous funds are generally defined as follows: Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.

Spontaneous Sources of Finance :

(a) Trade Credit: Trade credit is the credit extended to you by suppliers who let you buy now and pay later.

(b) Bills Payable: On the other hand in the case of “Bills Payable” the purchaser will have to give a written promise to pay the amount of the bill/invoice either on demand or at a fixed future date to the seller or the bearer of the note.

Due to its simplicity, easy availability and lesser explicit cost, the dependence on this source is much more in all small or big organizations. Especially, for small enterprises this form of credit is more helpful to small and medium enterprises. The amount of such financing depends on the volume of purchases and the payment timing.

(c) Accrued Expenses: Another spontaneous source of short-term financing is the accrued expenses or the outstanding expenses liabilities. The accrued expenses refer to the services availed by the firm, but the payment for which has yet to be made. It is a built in and an automatic source of finance as most of the services like wages, salaries, taxes, duties etc., are paid at the end of the period. The accrued expenses represent an interest free source of finance. There is no explicit or implicit cost associated with the accrued expenses and the firm can ensure liquidity by accruing these expenses.

Inter-corporate Loans and Deposits

Sometimes, organizations having surplus funds invest for shot-term period with other organizations. The rate of interest will be higher than the bank rate of interest and depends on the financial soundness of the borrower company. This source of finance reduces dependence on bank financing.

Commercial Papers

Commercial Paper (CP) is an unsecured promissory note issued by a firm to raise funds for a short period. This is an instrument that enables highly rated corporate borrowers for short-term borrowings and provides an additional financial instrument to investors with a freely negotiable interest rate. The maturity period ranges from minimum 7 days to less than 1 year from the date of issue. CP can be issued in denomination of ? 5 lakhs or multiples thereof.

Accounts Payable Journal Entries

#1 – Purchase of the merchandise inventory on account:

When there is a purchase of the merchandise inventory on account, by using the following journal entry, the liability relating to the accounts payable journal entries will be created:

Purchases a/c debit

To Accounts payable a/c

The journal entry passed above for recording the accounts payable liability will be made under the periodic inventory system. However, in the case of the company uses the perpetual inventory system, then the debt part would be replaced by the “inventory account” instead of “purchases account.” The entry, in that case, will be as follows:

Inventory a/c debit

To Accounts payable a/c


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