Page 133 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes
Example: Purchase of Machinery for cash.
Machinery a/c Dr.
To Cash

Notional Cash Flow

The indirect movement of cash ‘in’ and ‘out’ of the business is referred to as ‘notional flow of
cash’ which may take place under the following circumstances:

a. Notional inflow of cash: Notional inflow of cash takes place whenever a transaction
results in increasing current liabilities or decreasing current assets.

Example: Purchase of goods on credit.
Purchases A/c Dr.
To Creditors A/c

This transaction results in increasing creditors to the extent of credit purchases made.
Though there is no actual inflow of cash, goods purchased on credit can be converted into
cash. Hence, there is notional inflow of cash

b. Notional outflow of cash: Notional outflow of cash takes place whenever a transaction
results in decreasing current liabilities or increasing current assets.

Example: Sale of goods on credits:
Debtors A/c Dr.
To Credit Sales A/c

This transaction results in increasing book-debts/Bills Receivable to the extent of credit sale
made. Though there is no actual outflow of cash, goods sold on credit would have been sold for
cash and would cost the business in terms of materials, labor and overheads. Hence, there is
notional outflow of cash i.e. it may be considered as loan advanced to customers. Similarly,
when there is decrease in current liabilities, it may be due to part settlement of these dues.
Hence, such decrease in a current liability is treated as notional outflow of cash.

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