The sources of funds in an organization denotes the various ways in which cash inflows to operate the business is realized. The followings are some of the ways cash came into a business
Through an increase in liability
Through an increase in net worth
Through a decrease in asset
Through a net profit after tax
Though sales of shares, preferred or common stock
It also snows ways an extra money comes into the organization through consultancy services, borrowing in form of loan. Summarize sources of funds to any organization devotes all the ways money comes into an organization for its operational utilization and for achieving its stated goals and objectives. However for an organization to thrive well it must also spent money to achieve it stated goals and objectives, thus application of funds refer to the various ways the sourced funds are put to usage in order to increase the value of fixed or working capital. The followings are the various ways funds can b e put to use;
Where there is an increase in assets
Where there is a decrease in liability
Where there is a payment of cash dividend
When shares are purchased
Where there is a decrease in Net worth.
Having explained the meaning of sources and application of funds in a financial institution, it will be good to see what accounting bodies says about the same subject matter. The Accounting Standard Steering Committee (ASSC) in their Standard Accounting Practice No. 10 (ASSAP 10) requires that all firms with an annual turn over of gross income of N25,000 or more should produce funds statement. In its explanatory notes it describes the statement and principles underlying its preparation as follows.
That the profit and loss account and the balance sheet of a company should show the amount of profit during the year, and the disposition of the company’s resources at the beginning and the end of that year. But for a more understanding of the company’s affairs, its necessary to identify the movement of assets, liabilities and capital which have taken place during the year and the effect of such movements on the net liquid funds.
The above statement is not specifically stated in the balance sheet or profit and loss accounts but rather can be made available in form of statement of sources and application of funds (fund statement).
Though the fund statement is in no way a replacement for the profit and loss account or the balance sheet, but yet it contain in summary form the information contain in the two above. The objective of such statement is to show the manner in which the operations of a company are financed and the format selected should be designed to achieve this objective.
A fund statement should be able to show the resources from which funds flow into the company, and the way in which they are put to use. It should clearly show the funds generated or absorbed by the operation of the business and the manner in which any resulting surplus of liquid asets have been applied or any deficiency of such assets has been financed where by distinguishing the long term from the short term.
The statement should also distinguish the use of funds for the purchase of fixed assets from funds used in increasing the company. The fund statement will provide a link between the balance sheet at the beginning of the period, the profit and loss for the period, and the balance sheet at the end of the period. A minimum netting off should take place as this will tends to mark the significance of individual important figures for example the sale of one building and the purchase of another should generally be kept separate in a funds statement.
The figures from which a fund statement is constructed should generally be identifiable in the net profit and loss account, balance sheet and all related accounts or notes. Furthermore the fund statement should show:
The profit before tax or loss for the accounting period together with adjustment for items, which did not use funds or provide funds e.g. depreciation.
The individual paid and those proposed to be paid.
Acquisition and disposal of fixed and other non-current assets.
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