Types of Cash Flow

Types of Cash Flow

The flow or movement of cash may be of two types, namely,
actual flow of cash and notional flow of cash.

Actual Flow of Cash

There may be actual or direct flow of cash ‘in’ and ‘out’ of the business under the following circumstances:
A. Actual Inflow of Cash
Example: Issue of shares for cash.
Cash Alc Dr
To Share Capital Alc
This transaction results in the actual inflow of cash into the business. Similarly, there is inflow of cash when debentures are issued for cash, loans raised in cash, sale of fixed assets for cash, dividends received in cash etc.
B. Actual outflow of Cash
Example: Purchase of Machinery for cash. Entry:
Machinery Alc Dr.
To Cash
This transaction results in the actual outflow of cash from the business. Similarly, there is outflow of cash on repayment of loans, redemption of preference shares or debentures, payment of taxes, dividend, etc. in cash.

National Cash Flow

The indirect movement of cash ‘in’ and ‘out’ of the business is referred to as ‘notional flow of cash’ which may take place under the following circumstances:

A. National Inflow of Cash

Notional inflow of cash takes place whenever a transaction results in increasing current liabilities or decreasing current assets.
Example: Purchase of goods on credit:
Entry: Purchases Alc Dr.
To Creditors Alc
This transaction results in increasing creditors to the extent of credit purchases made. Though there is no actual inflow of cash, goods purchased on credit can be converted into cash. Hence, there is notional inflow of cash i.e., it may be considered as Joan taken from the creditors. Similarly, when the transactions result in decreasing current asset such as book-debts, bills receivable, stock etc., it is to be considered as notional inflow of cash [i.e. decrease may be due to collection of book – debts & B/R or the sale of stock).

B. National Outflow of Cash

Notional outflow of cash takes place whenever a transaction results in decreasing current liabilities or increasing current assets.
Example: Sale of goods on credits.
Entry: Debtors A/c Dr.
To Credit Sales A/c
This transaction results in increasing book-debts / Bills Receivable to the extent of credit sale made. Though there is no actual outflow of cash, goods sold on credit would have been sold for cash and would cost the business in terms of materials, labour and overheads. Hence there is notional outflow of cash i.e. it may be considered as loan advanced to customers. Similarly, when there is decrease in current liabilities, it may be due to part settlement of these dues. Hence, such decrease in current liabilities is treated as notional outflow of cash.