Various Sources of Bank Funds (12 Major Sources of Fund)

The sources of bank funds are divided into two categories:

  1. Internal sources and
  2. External Sources

Internal sources of bank funds 

Cash from operations is the main internal source. The Net Profit for this purpose will have to be adjusted for non-cash items, such as:

1. Depreciation

Depreciation does not result in the outflow of cash and, therefore, net profit will have to be increased by the amount of depreciation or development rebate charged in order to find out the real Chas generated from operations.

2. Amortization of intangible assets

The amount written off should, therefore, be added back to profits to find out the cash from operations.

3. Gains from the sale of fixed assets

Since the sale of fixed assets is taken as a separate source of funds, it should be deducted from the net profit.

4. Interests on long-term loans

Since such interest is to be shown as separate source o cash, it should be added back to net profit.

Sources of Bank Funds
Sources of Bank Funds

External sources of bank funds

There are a number of external sources of funds. Funds may be secured either by an increase in liabilities or a decrease in assets as explained below:

1. Increase in Share capital

The amounts to be raised by the issue of new shares or by calling the unpaid amount on the already issued shares are to be shown separately for equity shares and preference shares.

2. Increase in Long-term Borrowing

Long-term borrowing such as the issue of debenture, and loans from different banks are sources of cash. They should be shown separately.

3. Increase in Deferred Payment on Plant and Machinery

Plant and machinery may be purchased on a deferred payment basis. The number of such arrangements should, therefore, be shown as a source of funds during the concerned period.

4. Sale of fixed assets, investment, etc.

It results in the generation of cash and, therefore, is a source of cash.

5. Increase in other current liabilities

An increase in other current liabilities, such as creditors, bills payable, and outstanding expenses show that cash to the extent of increase in these liabilities has not gone out of the business though taken into account while finding out cash from operations. Such an increase, therefore, has to be taken as a separate source of cash.

6. The decrease in current assets

A decrease in current assets such as debtors, bills receivable, etc., shows that cash has been realized to that extent and, therefore, it is shown as a separate source of cash.

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