Is Funds From Operations a Source/Inflow or Application/Outflow

Funds Flow Cash Flow • Funds Flow Analysis • Study Notes •     n~12 t~5 «Note~12_Topic~6 » n~13 t~1
Funds from operations implies capital accumulated through profits from operations.

The Profit/Loss account shows a credit balance when there are profits and a debit balance when there are losses. The P/L account is closed by transferring its balance to either the Capital account or the Profit and Loss appropriation account, both of which are non-current liabilities.

For the purpose of the below explanation, assume that the profit and loss account is closed by transfer to the capital account and the capital account has a credit balance.

When there are profits

A transfer of net profit from profit and loss account to the Capital account will result in the capital account being credited and the profit and loss account being debited.

Capital account generally has a credit balance and any further credit to it would result in an increase in the balance in that account.

Dr Capital a/c Cr
Particulars Amount Particulars Amount
To Balance c/d
8,05,000
  		By Balance b/d
By Net Profit 		2,80,000
5,25,000 
8,05,000  8,05,000 
By Balance b/d 8,05,000

Capital would appear in the balance sheet as below

Balance Sheet of M/s ___ as on ___
Liabilities 31st March Assets 31st March
2009 2010 2009 2010
Capital
2,80,000
8,05,000
...
...
...
 

Capital account being a non-current account, an increase in its balance indicates an inflow of working capital (fund).

When there are profits, the funds from operations would amount to an inflow/source of funds.

When there are losses

A transfer of net loss from the profit and loss account to the Capital account will result in the capital account being debited and the profit and loss account being credited.

Capital account generally has a credit balance and a debit to it would result in a decrease in the balance in that account.

Dr Capital a/c Cr
Particulars Amount Particulars Amount
To Net Loss
To Balance c/d 		65,000
2,15,000  		By Balance b/d
2,80,000
 
2,80,000  2,80,000 
By Balance b/d 2,15,000

Capital would appear in the balance sheet as below

Balance Sheet of M/s ___ as on ___
Liabilities 31st March Assets 31st March
2009 2010 2009 2010
Capital
2,80,000
2,15,000
...
...
...
 

Capital account being a non-current account, a decrease in its balance indicates an outflow of working capital (fund).

When there are losses, the funds from operations would amount to an outflow/application of funds.

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