Notional Cash Flow

Notional cash flows result only in the case of increase or decrease in current assets. They result in indirect cash movements into or out of business. For example, increase in debtors does not result in any actual cash out flows since it is part of credit sales. 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:

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 A/c Dr.

To Creditors A/c

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).