Accruals and deferred income are spontaneous and interest free sources of unsecured short-term financing.these are the most common source of short-term financing for a firm.
Accruals
Accruals represent short-term liabilities for the service that have been provided to the firm but payment has not yet been made .the most common accruals are wages payable and taxes payable.because business firms generally pay created.similarly,the firm's own estimated income tax ,property tax ,tax deducted at source ,income tax withheld from employee payrolls and sales taxes collected are generally paid after specified period.thus, accrued taxes are created.since taxes are payment to the government ,they can not be manipulated by the firm.however ,a company can increase the average amount of accrued wages by lengthening the between paydays.for example,changing from twice a month pay cycle to a monthly pay cycle would effectively double a firm's average level of accrued wages.average level of accruals is always half of the total wages pr payroll.
Accruals tend to rise fall with the level of the firm's level of activity. for example,as level of production and sales increase,labor cost usually increase,as a result accrued wages increase.and as profit increase ,accrued taxes increase.hence,accruals are spontaneous source of financing.though accruals represent costless source of short-term financing ,postponement of payment to employee for longer period may have negative effect on employee's attitude towards the company .employees may respond wish absenteeism or reduce efficiency or they may seek employment elsewhere.so,a company must be careful in postponing wages.however, by delaying payment of accruals company can increase average accruals and save some amount of money.
To illustrate let us assume, a firm has a weekly payroll of Rs300,000.the firm is considering changing to a biweekly payroll to reduce the cost of writing checks and similar expenses by Rs 300 per payroll.the firm has a 14 percent cost of money.what would b the total annual saving if wages were paid every 2 week instead of weekly?
Here,if the firm owes Rs300,000at the end of week and zero at the beginning,the average wages accrual is half of the Rs 300,000 i.e. Rs 150,000.on a biweekly payroll this doubles.the firm receives an additional Rs 150,000 of interest free financing on the average the additional accruals can be invested elsewhere at 14 percent.the benefit will be (Rs150,000*14%)Rs 21,000 and a Rs 300 payroll expenses can be saved 26 times a year for another Rs 7,800 savings .the total benefit is Rs 21,000+ Rs 7,800 =Rs 28,000.
Deferred Income
Deferred income represents funds received by the firm for goods and service which it has agreed to supply in future.these receipts increase the firm's liquidity in the firm of cash;therefore they constitute a source of short-term funds.
Advance payments made by customers are primary sources of deferred income. these payments are not recorded as revenue until delivery of goods and service to the customers.they are ,therefore, shown as a liability in the firm's balance sheet and called deferred income.
Accruals
Accruals represent short-term liabilities for the service that have been provided to the firm but payment has not yet been made .the most common accruals are wages payable and taxes payable.because business firms generally pay created.similarly,the firm's own estimated income tax ,property tax ,tax deducted at source ,income tax withheld from employee payrolls and sales taxes collected are generally paid after specified period.thus, accrued taxes are created.since taxes are payment to the government ,they can not be manipulated by the firm.however ,a company can increase the average amount of accrued wages by lengthening the between paydays.for example,changing from twice a month pay cycle to a monthly pay cycle would effectively double a firm's average level of accrued wages.average level of accruals is always half of the total wages pr payroll.
Accruals tend to rise fall with the level of the firm's level of activity. for example,as level of production and sales increase,labor cost usually increase,as a result accrued wages increase.and as profit increase ,accrued taxes increase.hence,accruals are spontaneous source of financing.though accruals represent costless source of short-term financing ,postponement of payment to employee for longer period may have negative effect on employee's attitude towards the company .employees may respond wish absenteeism or reduce efficiency or they may seek employment elsewhere.so,a company must be careful in postponing wages.however, by delaying payment of accruals company can increase average accruals and save some amount of money.
To illustrate let us assume, a firm has a weekly payroll of Rs300,000.the firm is considering changing to a biweekly payroll to reduce the cost of writing checks and similar expenses by Rs 300 per payroll.the firm has a 14 percent cost of money.what would b the total annual saving if wages were paid every 2 week instead of weekly?
Here,if the firm owes Rs300,000at the end of week and zero at the beginning,the average wages accrual is half of the Rs 300,000 i.e. Rs 150,000.on a biweekly payroll this doubles.the firm receives an additional Rs 150,000 of interest free financing on the average the additional accruals can be invested elsewhere at 14 percent.the benefit will be (Rs150,000*14%)Rs 21,000 and a Rs 300 payroll expenses can be saved 26 times a year for another Rs 7,800 savings .the total benefit is Rs 21,000+ Rs 7,800 =Rs 28,000.
Deferred Income
Deferred income represents funds received by the firm for goods and service which it has agreed to supply in future.these receipts increase the firm's liquidity in the firm of cash;therefore they constitute a source of short-term funds.
Advance payments made by customers are primary sources of deferred income. these payments are not recorded as revenue until delivery of goods and service to the customers.they are ,therefore, shown as a liability in the firm's balance sheet and called deferred income.
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