Important Keyword: Cash Credit Account, Income Tax.
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How is Drawing Power calculated for a Cash Credit Account?
The Cash Credit limit, also known as a working capital limit, is a facility extended by banks and financial institutions to businesses for their day-to-day operations and expansion. This allows borrowers to withdraw funds as needed, with the limit typically sanctioned for a one-year period and renewable annually.
Drawing power represents the maximum amount that a borrower can withdraw within the cash credit limit. It is calculated based on specific margins and terms outlined in the sanction letter, with the margin representing the owner’s contribution to the business. Margin requirements can vary between banks and industries, commonly set at around 25% for stock and 40% for book debts.
The formula to calculate Drawing Power (DP) is:
Drawing Power = Net Value of Stock + Net Value of Debtors
Here, the Net Value of Stock is determined by subtracting creditors from the stock and then applying the margin on stock. Similarly, the Net Value of Debtors is calculated by applying the margin on debtors to the total debtors. These calculations yield the maximum amount that can be drawn against stock and debtors combined.
Example
The Drawing Power (DP) Calculation for the limited company as of the end of May ’21 is as follows:
DP Power Calculation:
| A | Total Stock | Rs. 1400000 |
| B | Less: Creditors | Rs. 300000 |
| C | Net paid stock (A-B) | Rs. 11,00,000 |
| D | Less: Margin on stock @25% | Rs. 2,75,000 |
| E | Drawing Power (DP) on stock (C-D) | Rs. 8,25,000 |
| F | Total Book Debtors | Rs. 500000 |
| G | Less: Debtors > 90 days | Rs. 1,00,000 |
| H | Net Debtors for DP (F-G) | Rs. 4,00,000 |
| I | Less: Margin on Debtor @40% | Rs. 1,60,000 |
| J | Drawing Power (DP) on Debtor (H-I) | Rs. 2,40,000 |
| K | Total Drawing Power (E+J) | Rs. 10,65,000 |
The final drawing power shall be the lower of the sanctioned limit or the DP calculated above.
As per RBI guidelines, the Drawing Power is determined based on the stock statement, which should not be older than three months. Any outstanding amount based on a stock statement older than three months would be considered irregular.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
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