Tag: Managerial Economics

Investment Transactions

We normally have the following two types of investments transactions:

• Cum Dividend or Cum Interest Quotations and
• Ex-Dividend or Ex-Interest Quotations

Cum Dividend or Cum Interest Quotations

Interest and dividend on the fixed investments accrued on regular interval, but payment of those are made only on fixed dates. Dividends are always paid to the persons, who are shareholder at the time of payouts. Suppose a shareholder sold his shares after keeping those shares in his hand up to ten months, then dividends on those shares will be paid to the buyer or we can say, to new shareholder.

So, a seller at the time of selling shares normally charge value of the accrued dividends up to the date of sale, and this is called ‘CUM DIVIDEND” or “CUM INTEREST”. Since, the sale price is inclusive of the value of a share and interest or dividend, therefore at the time of entry in the books of accounts, normal price of share should be booked in the investment account and the value of dividend or interest should be debited to dividend or interest account.

At the time of receiving dividend or interest, dividend or interests account will be credited, debiting cash or bank account. On the other hand, in the books of seller, normal price of the share should be credited to Investment account and the price of accrued dividend or interest should be credited to the dividend or interest account as the case may be.

Accounting Entries: It can be understand through the following table.

In the Books of Seller

x-Dividend or Ex-Interest Quotations

The buyer of shares when he is quoted ex-dividend is not entitled to receive the payment. It is the interval between the record date and the payment date during which the stock trades without its dividend. Therefore, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock.

Difference between Cum-dividend and Ex-Dividend

Major differences between them are given as:

• Cum interest or dividend prices are inclusive of the interest or dividend accrued at the date of purchase, whereas in case of the ex-dividend, prices are excluding value of the dividend or interest.
• The purchase price is higher than normal purchase price in case of Cum-dividend, whereas purchase price is the real price in case of ex-dividend.
• Nothing is payable additional in case of Cum-Interest, whereas separate amount of the dividend or interest has to be paid in case of the ex-dividend or ex-interest.

Balancing the Investment Account

Difference of debit and credit side of the investment account is Profit or Loss in case where all the investments are sold.

In case where part of the investments are sold and the balance investments stand unsold, it should be carried forward to the next accounting period and remaining balance of the two sides (debit and credit) will represent profit or loss on the sale of investment.

In case where investments are the fixed assets, then the profit or loss will be of capital revenue or capital loss and should be treated accordingly.

Equity Share Accounts

• Bonus Shares: Bonus shares are issued by the profitable companies to the existing shareholders of the company without any additional amount. Purpose of the bonus share is to capitalize reserves of the company. Only number of the shares will be added in face value column, and principle or capital column will remain unchanged.
• Right Shares: Right shares are first offered to the existing shareholders of the company as a matter of the right, hence called as right shares. As per Companies Act, right shares can be issued after two years of the establishment of a company or after one year of first issue.

Investment accounting is the management and analysis of accounts actively involved in investments. Working in this profession allows you to make business investment decisions and choose stocks, bonds and debts that are stable and profitable. Thoroughly exploring the answer to, ‘What is investment accounting?’ can help you learn more about the profession and help you determine whether it is the right career choice. In this article, we discuss what investment accounting is, explore what an investment accountant does, understand their average salary and skills and discover steps to become an investment accountant.

When researching various accounting careers, you might wonder, ‘What is investment accounting?’. Investment accounting is a specialization in the accounting field that analyses and manages investments accounts. While some manage their investments, people with large investment portfolios hire certified investment accountants. Investment accounting involves managing bonds, stocks and other investments for brokerage firms and portfolio managers. Professionals working in investment accounting field are investment accountants who monitor clients’ investments, manage debt investments and keep track of any third-party investment activities.

Common job duties for an investment accountant:

• Monitor client investments: These professionals monitor and maintain the investment of clients and businesses. They understand various rules about managing investments in a particular region.
• Manage debt investment: Debt investment is another key responsibility of investment accountants. When companies or individual wants to invest in stable and predictable options, these professionals prefer debt investments over stocks.
• Track third-party activities: A part of an investment accountant’s job role involves tracking their clients’ investments. Tracking these activities is essential because it affects a client’s financial standing.
• Prepare tax reports: Another critical job duty of an investment accountant is creating tax reports that give details about the company’s investment accounts. So, it is essential to maintain accurate records.
• Analyze investment activities: Employers expect these professionals to analyse the company’s investment activities and make proper recommendations to management personnel.
• Coordinate with others: Investment accountants coordinate and manage every aspect of the general ledger accounting. These professionals interact with other accountants and portfolio managers to manage ledger accounting.
• Ensure compliance: Many organisations rely on these accountants to process taxes and reports that comply with relevant regulations.

Employers expect these professionals who are knowledgeable in bonds, stocks and precious metals like shares and gold, among other forms of investment. It is essential to keep track of the constantly changing investment field to perform their job duties.

If the investor intends to hold an investment to its maturity date (which effectively limits this accounting method to debt instruments) and has the ability to do so, the investment is classified as held to maturity. This investment is initially recorded at cost, with amortization adjustments thereafter to reflect any premium or discount at which it was purchased. The investment may also be written down to reflect any permanent impairments. There is no ongoing adjustment to market value for this type of investment. This approach cannot be applied to equity instruments, since they have no maturity date.

Trading Security

If the investor intends to sell its investment in the short-term for a profit, the investment is classified as a trading security. This investment is initially recorded at cost. At the end of each subsequent accounting period, adjust the recorded investment to its fair value as of the end of the period. Any unrealized holding gains and losses are to be recorded in operating income. This investment can be either a debt or equity instrument.

Available for Sale

An available for sale investment cannot be categorized as a held to maturity or trading security. This investment is initially recorded at cost. At the end of each subsequent accounting period, adjust the recorded investment to its fair value as of the end of the period. Any unrealized holding gains and losses are to be recorded in other comprehensive income until they have been sold.

Equity Method

If the investor has significant operating or financial control over the investee (generally considered being at least a 20% interest), the equity method should be used. This investment is initially recorded at cost. In subsequent periods, the investor recognizes its share of the profits and losses of the investee, after intra-entity profits and losses have been deducted. Also, if the investee issues dividends to the investor, the dividends are deducted from the investor’s investment in the investee.

Realized Gains and Losses

An important concept in the accounting for investments is whether a gain or loss has been realized. A realized gain is achieved by the sale of an investment, as is a realized loss. Conversely, an unrealized gain or loss is associated with a change in the fair value of an investment that is still owned by the investor.

There are other circumstances than the outright sale of an investment that are considered realized losses. When this happens, a realized loss is recognized in the income statement and the carrying amount of the investment is written down by a corresponding amount. For example, when there is a permanent loss on a held security, the entire amount of the loss is considered a realized loss, and is written off. A permanent loss is typically related to the bankruptcy or liquidity problems of an investee.

An unrealized gain or loss is not subject to immediate taxation. This gain or loss is only recognized for tax purposes when it is realized through the sale of the underlying security. This means that there may be a difference between the tax basis of securities and their carrying amount in the accounting records of the investor, which is considered a temporary difference.

Farm final accounts can be prepared according to any of the following two methods:

1. Single Entry Method.
2. Double Entry Method.

Single Entry Method:

This method does not require maintenance of an elaborate system of accounting to ascertain the profit or loss and financial position of the business. The method requires the preparation of two statements of affairs one at the beginning of the accounting period and the other at the end of the accounting period.

The excess of assets over liabilities is the net-worth of the business. The profit or loss made by the business during a period can be ascertained by comparing the net-worth of the business on two dates, after making suitable adjustments for drawings, introduction of additional capital etc. (For more details, refer Single Entry System of Accounting).

Double Entry Method:

Accounting information contained in the accounting records may be presented in the form of an account for each type of product, for example, Wheat Account, Rice Account etc. Each Account is to be debited with opening stock, and the relevant expenses incurred, and the relevant expenses in­curred, and credited with the sale proceeds and the closing stock.

The difference between the two sides of each account shows profit or loss. The profit or loss of each such account is transferred to General Profit and Loss Account, to which common expenses of all the activities of the farm are charged so as to arrive at net profit or loss, to be transferred to Capital Account. Finally, Balance Sheet is prepared.

Farm accounting or accounting for agricultural farms is the application of accounting practices to agricultural operations. In recent years, commercial fanning has been engaging the attention of many and as a result a number of farmers are coming up. Corporate entities are entering into the farming business in a big way.

Therefore, the Institute of Cost and Works Accountant of India issued a book­let, explaining how the farm books should be kept and how the profit or loss arising from the farming operations should be ascertained. The farm accounting is a technique of using accounting data for cost and profit ascertainment of each farming activity and decision making with regard to the most profitable line of activity.

Accounting for Farms:

Transactions, relating to farming activities may be categorized into four-Cash, credit, and exchange and notional. The cash and credit transactions are recorded in normal manner as any other business transaction.

The exchange transactions, in the nature of barter, for example, exchange of animal labour for human labour, exchange of seeds for output, etc. are normally recorded at opportunity cost the price in the open market.

Notional transactions are those that take place between the members of the owner’s family and the farm, viewing the farm as an independent entity notionally. Some examples of such transactions are: use of household capital, use of land owned by the farm household, labour provided by members of the family, consumption of output by the family etc.

Profitability of Crops:

The performance of each crop shall be found out separately. The direct cost clearly identifiable with a crop shall be charged accordingly. The common cost should be suitably allocated on some accepted basis, For instance, depreciation or repairs can be divided on the basis of estimation of usage by different crops. Interest on fixed loan can be divided on the basis of length of crop season etc.

Books of Accounts:

The basic document needed is farm diary, where transactions are recorded in chronological or­der:

(1) Cash book:

As the business is carried on by families, it may not have time and resources for an elaborate system. The business is mostly carried on cash basis and therefore, by provid­ing analytical columns in the cash book, both on receipts and payments side, the accounting can be made very simple.

Analytical column cash book will help the farmer to do away with other subsidiary books and also the ledger and yet, he will obtain all the information, he needs to prepare the final accounts.

(2) Debtors and Creditors Register, to keep credit transactions.

(3) Stock Register, which shows input and output of goods, sale, wastage and balance of stock.

(4) Fixed Assets Register contains details of cost of assets, depreciation and balance of assets.

(5) Loan Register, contains record of loans, details of interest etc.

(6) Register for Notional Transactions for making a record of transactions between farm and farm household.

(7) Cost Analysis register, for keeping records of each farming activity, in order to know the profit of each activity.

Cost and Revenue:

Expenses and incomes associated with farming activities, other than agricultural activities are given below:

(A) Poultry Farm:

Expenses or Costs:

1. Costs of chicken, feed;
2. Stocks like hay, packing boxes, fuel;
3. Maintenance cost of sheds;
4. Medicines;
5. Salaries and wages.

Revenue:

1. Sale of eggs, chickens, broiler, hens;
2. Sale of poultry excretions as manures.

(B) Dairy Farms:

Expenses or costs:

1. Cattle feed and hay;
2. Cost of cultivation of feed crop, if any;
3. Insecticides;
4. Salaries and wages;
5. Cost of maintaining milk processing facilities.

Revenue:

1. Sale of milk;
2. Sale of milk products;
3. Sale of calves;
4. Sale of dairy cattle;
5. Sale of slaughtered cattle.

(C) Fisheries:

1. Cost of seed;
2. Cost of water;
3. Cost of fish feed;
4. Maintenance costs of tanks;
5. Catching expenses;
6. Depreciation of nets and other assets;
7. Salaries and wages.

Revenue:

1. Sale of fish.

Treatment of Specific Items:

1. Land Development Expenses:

A business may purchase land for cultivation. A lot of money may have to be spent by the business on cleaning, leveling the land, providing drainage, irrigation facili­ties etc. before the land can be used for cultivation. All these expenses are termed as “Land Develop­ment Expenses”, and should preferable is added to the cost of land.

2. Drawings:

A farmer or his family may consume a part of farm production.

It is recorded as:

Drawings Account    Dr.

To Crop or Milk or Poultry or Fish Account.

3. Similarly, when Farm Products are Consumed by Farm Workers it is Recorded as:

Wages Account Dr.

To Crop or Milk or Poultry or Fish Account

Apportionment Basis for Common Costs:

Seed, fertilizer, manure, pesticides, direct wages (Notional and Actual), land rent (Notional and actual) etc. can be identified crop-wise. But other costs like irrigation, services of agricultural machinery, implements or animal power depreciation, interest on capital etc. cannot be classified simply by nomenclature. Common costs of the agricultural farms are to be suitably apportioned among the crops for which such costs were incurred.

Many a time, common costs have been incurred for crop enterprises as well as livestock enterprises. Common costs should be apportioned among the crop enterprises on the basis of usage, wherever use of assets can be quantified. In other cases, length of crop season can be used.

The current purchasing power (CPP) method is also known as general price-level accounting. CPP adjusts historical cost based on changes in the general level of prices, as measured by the general price level index. Changes in the general level of prices represent changes in the general purchasing power of the monetary unit.

CPP is a mixed method in which financial statements are prepared on a historical basis. These statements, in the end, are converted based on the current purchasing power of the currency. Profit and loss items and balance sheet items are adjusted with the price index.

The basic idea of the CPP method is to apply changes in the value of money in response to changes in general price index.

Inflation reduces an individual’s purchasing power to purchase goods and services, while deflation increases an individual’s purchasing power to purchase goods and services.

Historical financial statements show transactions at various points in time and, as such, they also show replacement purchasing powers at various points in time.

CPP accounting transforms diverse historical measures into a single measure: namely, that of current purchasing power, which represents purchasing power at the same point in time.

Thus, CPP accounting makes all accounting numbers comparable in terms of general purchasing power. This is achieved by removing the mixed purchasing power element from historical financial statements.

CPP differs from current cost accounting (CCA) in that, under CPP, the current values of various assets are not worked out; instead, financial statements are stated in terms of dollars of uniform value.

Hence, the CPP method considers changes in price levels that are denoted by the general price index. Thus, all amounts are expressed in units of equal purchasing power.

Since the CPP method reflects the effects of changes in the general price level, it is also known as general price-level accounting.

Characteristics of CPP Method

1. A supplementary statement is prepared and annexed to historical financial statement. The supplementary statement includes re-statement of income statement and re-stated balance sheet.
2. Any statement prepared under CPP method is based on the historical statement.
3. Consumer price index or wholesale price index is used as conversion factor for re-stated of historical items.
4. All the items in financial statement are classified into monetary and non-monetary items. Non-monetary items are adjusted, there is no need of any adjustment for the monetary items.
5. Net gain or loss account of monetary items is to be accounted in the profit and loss account.

Steps:

(1) Calculation of Conversion Factor

CPP method involves the restatement of historical figures at current purchasing power. For this purpose, historical figures must be multiplied by conversion factors. The formula for the calculation of the conversion factor is:

• Conversion factor = Price Index at the date of Conversion/Price Index at the date of item aros
• Conversion factor at the beginning = Price Index at the end/Price Index at the beginning
• Conversion factor at an average = Price Index at the end/Average Price Index
• Conversion factor at the end = Price Index at the end/Price Index at the en
• Average Price Index = Price Index at beginning + Price Index at the end/2
• CPP Value = Historical value X Conversion factor

(2) Distinction between Monetary and Non-monetary Accounts

CPP method classifies all assets and liabilities into two groups’ i.e. monetary items and non-monetary items.

Monetary Items: Monetary items are assets and liabilities, the amounts of which are receivable or payable only at a current monetary value. Monetary assets include cash, bank, bills receivables, debtors, prepaid expenses, account receivables, investment in bond or debentures, accrued income, etc. Monetary liabilities include creditors, accounts payable, bills payable, outstanding expenses, notes payable, dividend payable, tax payable, bonds or debentures, loan, advance income, preference share capital, etc.

Non-monetary Items: Those items which cannot be stated in fixed monetary value are called non-monetary items. Such items denote assets and liabilities that do not represent specific monetary claims. Non-monetary accounts include land, building, machinery, vehicles, furniture, inventory, equity share capital, irredeemable preference share capital, accumulated depreciation, etc.

(3) Gain or Loss on Monetary items

Monetary items are receivable or payable in a fixed amounts irrespective of changes in the purchasing power of money. The change in purchasing power of money has an effect on monetary assets and monetary liabilities, Therefore, the holding of such items results in gain or loss in terms of real purchasing power. Such gain or loss is termed as general price level gain or loss.

(4) Valuation of Cost of Sales and Inventories

Cost of sales and inventory value vary according to cost flow assumptions i.e. first-in-first-out (FIFO) or last-in-first-out (LIFO). Under FIFO, the cost of sales comprises the entire opening stock and current purchases less closing stock. And closing is entirely from the current purchase. Under the LIFO method, the cost of sales comprises the current purchase only.

(5) Restated Balance Sheet

The historical balance sheet is prepared as per the historical income statement, so it can not represent the revised or changed value of assets and liabilities. Under the price level change, the historical balance sheet should be revised to reflect the true picture of the financial position of any organization. Inside the historical balance sheet, both monetary and non-monetary items are listed.

General insurance or non-life insurance policy, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance is typically defined as any insurance that is not determined to be life insurance. It is called property and casualty insurance in the United States and Canada and non-life insurance in Continental Europe.

In the United Kingdom, insurance is broadly divided into three areas: personal lines, commercial lines and London market.

The London market insures large commercial risks such as supermarkets, football players and other very specific risks. It consists of a number of insurers, reinsurers, P&I Clubs, brokers and other companies that are typically physically located in the City of London. Lloyd’s of London is a big participant in this market. The London market also participates in personal lines and commercial lines, domestic and foreign, through reinsurance.

Commercial lines products are usually designed for relatively small legal entities. These would include workers’ compensation (employers liability), public liability, product liability, commercial fleet and other general insurance products sold in a relatively standard fashion to many organisations. There are many companies that supply comprehensive commercial insurance packages for a wide range of different industries, including shops, restaurants and hotels.

Personal lines products are designed to be sold in large quantities. This would include autos (private car), homeowners (household), pet insurance, creditor insurance and others.

ACORD, which is the insurance industry global standards organization, has standards for personal and commercial lines and has been working with the Australian General Insurers to develop those XML standards, standard applications for insurance, and certificates of currency.

Types of General Insurance:

General insurance is sub-divided into:

(a) Fire

(b) Accident

(c) Marine.

General Insurance was controlled and conducted by General Insurance Corporation of India before the incorporation of Insurance Regulatory and Development Authority (IRDA) in 2002. General Insurance companies are to prepare accounts (Revenue) for each individual unit. General Insurance policies are issued for a short period, say, for a year, but it may be renewed. The Policies are issued at any date of the year.

In a general insurance, the liability of the insurer arises only when the insured suffers any loss caused by specific reasons and, consequently, he will be indemnified. If no loss is occurred question of compensation does not arise and the premium which was paid will not be carried forward for the next period; rather the same will be lapsed and will not be adjusted.

Marine Insurance:

A marine insurance contract is an agreement by which the insurer undertakes to indemnify the assured in the manner and to the extent thereby agreed, against marine losses. In other words, it is a contract which protects the insured against losses on inland water or any land risk which may be incidental to any sea voyage: Sec 4(i). In short, this policy may cover a ship during buildings or the launch of a ship or any adventure analogous to a marine adventure.

Fire Insurance:

Similarly, fire insurance means insurance against any loss caused by fire. Fire Insurance business means the business of effecting, otherwise than incidentally to some other class of business, contract of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies; Sec. 2(6A).

Accidental Insurance:

It is other than Life Insurance, Marine and Fire Insurance.

Like Life Insurance Companies, in general insurance also from April 2000 a good number of private players have come into the field:

(a) Tate AIG General Insurance;

(b) Reliance General Insurance Company

(c) HDFC-Chubb General Insurance;

(d) Bajaj Alliance General Insurance Co. Ltd.;

(e) Royal Sundaram Alliance Insurance Co. Ltd.

(f) IFFCO Tokyo General Insurance Co. Ltd.

(g) ICICI Lombard General Insurance Co. Ltd.

(h) Export Credit Guarantee Corporation Ltd. etc.

In 1971, General Insurance Corporation of India was established which was the holding company of:

(i) National Insurance Co. Ltd.;

(ii) United India Insurance Co. Ltd. and

(iii) The New India Assurance Co. Ltd.

However, from Dec. 2000, GIC became The National insurer for General Insurance.

Thus, they are treated as independent Insurance companies.

Regulatory Framework:

While preparing and presenting accounts for Insurance companies various rules and regulations should be taken into consideration.

The following Acts and Regulations are to be considered:

(a) The Insurance Act, 1938;

(b) The Companies Act, 1956;

(c) The General Insurance Business (Nationalization) Act, 1972;

(d) The Insurance Regulatory and Development Authority, 1999;

(e) The Insurance Regulatory and Development Authority Regulations, 2002.

Applicability of Accounting Standards:

While preparing Receipts and Payments Account, Profit and Loss Account and the Balance Sheet of the Insurance companies, the recommendations of Indian Accounting Standards (A3) framed by the ICAI should strictly be followed as far as practicable, to the General Insurance Company with the exception of

(i) AS 3 (Cash Flow Statement): To be prepared under Direct Method only.

(ii) AS 13 (Accounting for Investment): Not to be taken into consideration.

(iii) AS 17 (Segment Reporting): To be applied in general without considering the class of Security.

Acceptances, endorsements and other obligations basically represents the bills accepted or endorsed by the bank on behalf of its customers. A bank has to disclose all it’s acceptances, endorsements and other obligations under the head Contingent Liability on the face of the balance sheet. It’s an off balance sheet item, for informative purpose.

This item includes the following balances:

(a) Letters of credit opened by the bank on behalf of its customers; and

(b) Bills drawn by the bank’s customers and accepted or endorsed by the bank (to provide security to the payees).

The total of all outstanding letters of credit as reduced by the cash margin and after deducting the payments made for the bills negotiated under them should be included in the balance sheet. In case of revolving credit, the maximum permissible limit of letters of credit that may remain outstanding at any point of time as reduced by the cash margin should be shown. If the transactions against which the letter of credit was opened have been completed and the liability has been marked off in the books of the bank, no amount should be shown as contingent liability on this account.

Advantages

• If the bills of exchange are endorsed by the importer’s bank, exporters may choose to collect the bills earlier than their due dates by having them discounted via any bank.
• With payments guaranteed by the bank, your company has greater flexibility and security in its foreign trade transactions.

It is a liability of a bank in respect of bills accepted or endorsed on behalf of its customers including letter of credit issued and guarantees given. A security is usually required for this purpose and a commission is charged by the bank. The customers are liable to pay to the bank for full payment of the bills plus any loss or expenses that may be incurred.

As a result, this item will appear in both sides of the Balance Sheet in the following manner:

On Liabilities side:

Acceptance, Endorsements and other obligations as per contra.

On Assets side:

Constituent’s liabilities for acceptance, Endorsements, and other obligations as per contra.

Branch Adjustments:

A banking company may have different branches in different places. As a result, some transactions may take place between the head office of the bank and its branches. Head office passes necessary entries after receiving the periodical statements from the branches.

In the absence of such information, some entries remains unadjusted in the head office books at the time of preparing the final accounts. Therefore, such entries are recorded in the Balance Sheet under the head ‘Branch Adjustments’. It may appear on either side of the Balance Sheet depending on the Debit or Credit Balance.

Unexpired Discounts, or Rebates on Bills Discounted:

If a bank discounts a bill or purchases a hundi etc. it receives discount for the full period which is credited to Discount Account. But the point is that the bank is not entitled to take credit for any greater amount of such discount than what has actually been earned to the Balance Sheet date.

As a result, such discounts are apportioned between the current year and the next year and the amount which is carried forward is shown in the Balance Sheet under the head ‘Unexpired Discount’ or ‘Rebate on Bills Discounted’.

Money at Call and Short Notice:

It includes:

(i) Inter-bank call money and

(ii) Call money at short notice.

These are actually inter-bank transactions. Under this head, money is borrowed by one bank from another for a period of 3 days to 31 days and, naturally, the bank having surplus money advances such loans to the bank having short supply of money. These transactions are transacted with the help of brokers who charge brokerage usually @½% from both the banks. The rate of interest, of course, fluctuates every day, depending on the demand and supply of money.

Advances:

It includes the following (if advances are made by Indian banks):

(i) Loans

(ii) Cash Credit

(iii) Overdrafts

(iv) Bills discounted and purchased.

Loans:

A loan is an advance of money made with or without security. A certain amount is advanced for a stipulated period at an agreed rate of interest in a loan account. The rate of interest is lower than rate of interest of cash credit.

Most of the business houses prefer to use cash credit although the rate of interest is higher since the same is most convenient to them.”

Cash Credit:

It is an arrangement made between the bank and its customer so that the former allows the latter to borrow money up to a certain limit. It is not always necessary that the money should immediately be withdrawn. It is usually sanctioned on hypothecation or pledge of stock.

Overdraft:

If a customer requires funds for a short period and he has a current account in a bank, he may be allowed to overdraw his current account with or within a certain limit fixed by the banking authorities.

The rate of interest is generally higher than the rate of interest of Cash Credit. It is advantageous on behalf of the customer since he is to pay interest only on the amount that has already been taken.