Influence of transactions involving nominal accounts on Working Capital (fund)

Do transactions involving nominal accounts influence Fund (Working Capital)

At the end of the accounting period,

	All the nominal accounts are closed by transfer to the trading and profit and loss account.
+	Profit and loss account is closed by transfer to either the capital account or the profit and loss appropriation account.
+	Profit and loss appropriation account is shown along with the reserves in the balance sheet.
⇒	The Profit and loss appropriation account is a non-current account and it can be considered to be a representative account for all the nominal accounts.
⇒	A debit/credit to a nominal account has the affect of a debit/credit to a non-current account (the Profit and loss appropriation account).

Cross Transactions involving nominal accounts

Where in a transaction involving a nominal account, the account other than the nominal account is a current account, the transaction becomes a cross transaction.

Since,

	A cross transaction involves one account from the current area and another account from the non-current area of the balance sheet.
+	A debit/credit to a nominal account has the affect of a debit/credit to a non-current account.

The following transactions would be cross transactions and thus bring about a in working capital

Transactions resulting in

a charge on profits representing expenses.
an accrual of profits representing incomes.

The following transactions would not be cross transactions and thus do not bring about a in working capital

Transactions resulting in

a charge on profits representing losses.
an accrual of profits representing gains.
Approrpriations of profits.
Adjustment of losses.

Transactions involving two nominal accounts would not be a cross transaction, and thus does not bring about a change in fund (working-capital).

Transactions resulting in a charge to profit/loss account

Transactions involving nominal accounts which ultimately result in a charge to the profit and loss account are transactions relating to expenses and losses.

Expenses

In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a current natured account.

Paid cash towards expenses

Dr. Expenditure a/c
Cr. Cash/Bank a/c

Non-Current
Current Asset

Purchased goods on credit

Dr. Purchases a/c
Cr. Creditors a/c

Non-Current
Current Liability

All transactions relating to expenses can be considered to be cross transactions in general.

Losses

In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a non-current natured account.

Loss on Sale of Asset

Dr. Loss on Sale of Asset a/c
Cr. Asset a/c

Non-Current
Non-Current Asset

Depreciation on Assets

Dr. Depreciation on Asset a/c
Cr. Asset a/c

Non-Current
Non-Current Asset

Goodwill Written off

Dr. Profit and Loss a/c
Cr. Goodwill a/c

Non-Current
Non-Current Asset

All transactions relating to losses can be considered to be non-cross transactions in general.

Writing off Intangible assets like Goodwill, Patents, Trademarks etc., charging depreciation, writing off brought forward deferred revenue expenses, writing off loss on issue of shares, discounts on issue of debentures, writing off loss on sale of assets etc., are some such transactions.

Transactions resulting in accrual of incomes to profit/loss account

Transactions involving nominal accounts which ultimately result in accrual of income to the profit and loss account are transactions relating to incomes and gains.

Incomes

In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a current natured account.

Received commission

Dr. Cash/Bank a/c
Cr. Expenditure a/c

Current Asset
Non-Current

Sold goods on credit

Dr. Debtors a/c
Cr. Sales a/c

Current Asset
Non-Current

All transactions relating to incomes can be considered to be cross transactions in general.

Gains

In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a non-current natured account.

Profit on Sale of Asset

Dr. Asset a/c
Cr. Profit on Sale of Asset a/c

Non-Current Asset
Non-Current

All transactions relating to losses can be considered to be non-cross transactions in general.

Transactions resulting in appropriations of profits

Transactions involving nominal accounts which represent appropriations of profits from the profit and loss account do not form cross transactions and thus do not bring about a change in fund (working capital).

Creation of General Reserve

Dr. Profit and Loss a/c
Cr. General Reserve a/c

Non-Current
Non-Current Liability

Transactions resulting in adjustment of losses

Transactions involving nominal accounts which represent adjustment/transfer of losses from the profit and loss account do not form cross transactions and thus do not bring about a change in fund (working capital).

Contingency Reserve absorbing the loss

Dr. Contingency Reserve a/c
Cr. Profit and Loss a/c

Non-Current Liability
Non-Current

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