What is C.C account/cash credit, and by whom it is maintained and how is it accounted in the books of account?

as i am new to accounts practical explain in details.

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rohin b

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There are many ways in which finance can be raised Cash Credit is one of the many ways of raising finance (i.e. it is a type of loan account). Meaning : Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take the amount of loan to the extent required by him but not exceeding the limit of Rs. 1 Lakhs. Purpose : The purpose for which loan is required is essential to ascertain, as for different purposes different types of loan can be taken. Eg. Incase the loan is required to purchase fixed assets like plant and machinery, term loan must be taken as plant and machinery are long term assets it will take time in repayment of the loan and repayment can be done in EMIs (Equated Monthly Installments). Where as a loan required for working capital needs a long term loan is not required as repayment does not require long period, hence cash credit may be availed. Explanation of Cash Credit loan facility : If for eg. a person is having a business. To carry on this business he needs to purchase raw material, and sell the goods. For this he needs working capital to run his daily business. Working capital means current assets minus current liabilities. Where current assets comprise of investment in stock, sundry debtors, cash, etc., current liabilities comprise of sundry creditors, suppliers of stock(incase of stock taken on credit), etc. The reason working capital is current asset minus current liabilities because money is required to purchase stock, this stock when still not sold will be of some value for which cash is invested in it and the part that is sold but on credit to customers(debtors) here also cash is not received and cash is invested. Hence in both the items money is put in. On the other hand incase of stock which is purchased on credit (creditors) here no money is put in, i.e. the stock purchased without investment. Hence total amount of money put in or invested in running the business is only to the extent of money invested in stock in hand(for which money is paid) and debtors(where again money is invested) less the amount of stock received on credit form creditors(here the amount is not invested for purchase of stock). This working capital that is required to run the business can be either funded by the businessman him self or if he does not have the money he can take a loan i.e. Cash credit. In Cash Credit facility an amount of loan is given to the borrower/businessman for his working capital needs. The entire amount of working capital required is not funded by the bank, some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan. This is as per RBI rules. The amount of loan to be given is decided on the basis of different types of methods like MPBF (Maximum Permissible Bank Finance) suggested by Tandoon Committee or other methods. These methods use formulae which take into consideration actual working capital required. The amount so worked out is given as loan and is called as limit this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every day is not the same, i.e. on one day the amount of working capital required may for eg. may be Rs. 96,000 and on a another day it may be Rs. 92,000 as some debtor might have paid up some amount. Hence the businessman will require Rs.96,000 on one day and he will require Rs. 92,000 on the other day only. He on a particular day may require Rs. 1,07,300 but the loan amount that he can get is any amount which is

not more than the limit of the loan given. If in the above eg. Limit is say Rs. 1 lakh then when he requires Rs. 1.07300 he will get loan upto Rs. 1 lakh only. The reason why he should borrow different amounts on different days as per the amount required by him on that day is that the interest calculated is on daily basis on the amount borrowed by him on different days. i.e. if amount required by him say on a particular day is say Rs.92,000 but he takes entire amount Rs. 1,00,000 he will have to pay interest on entire amount of Rs. 1 lakh. However if he would have only taken say Rs. 92,000 which he required he would have to pay interest on Rs. 92,000 only and not on Rs 1,00,000. Your second question as to by whom the account is maintained? The answer to that is the bank will maintain the account in its own books and will provide the cash credit account holder with a monthly statement of the account. As for as accounting in the books of account of the borrower the amount of balance reflected in the statement as on the last date of accounting i.e. say 31/03/2007 called as outstanding balance should be taken in the Balance sheet, liabilities side and the interest amount shown in the statement to be taken to Profit and Loss Account, debit side.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Lending money to the public Lending money is one of the two major activities of any Bank. Banks accept deposit from public for safe-keeping and pay interest to them. They then lend this money to earn interest on this money. In a way, the Banks act as intermediaries between the people who have the money to lend and those who have the need for money to carry out business transactions. The difference between the rate at which the interest is paid on deposits and is charged on loans, is called the "spread". Banks lend money in various forms and they lend for practically every activity. Let us first look at the lending activity from the point of view of security. Loans are given against or in exchange of the ownership (physical or constructive) of various type of tangible items. Some of the securities against which the Banks lend are : 1. 2. 3. 4. 5. 6. 7. Commodities Debts Financial Instruments Real Estate Automobiles Consumer durable goods Documents of title

Apart from the above categories, the Banks also lend to people on the basis of their perceived personal worth. Such loans are called clean and the Banks are understandably cagey about extending such loans. The credit card arms of the various Banks, however, fill up this void. Cash credit Account This account is the primary method in which Banks lend money against the security of

commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank. Overdraft The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. How does this account then differ from a Cash Credit Account? The difference is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are called clean overdrafts. Bill Discounting Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction. Term Loan Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category. Classification of loans Another way to classify the loans is through the activity being financed. Viewed from this angle, bank loans are bifurcated into :

Priority sector lending Commercial lending

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What is the difference between current account and cash credit accounts?