DEBT & DEFICIT

Debt is an amount of money borrowed on which some coupon or interest is regularly or once payable banking on the contract between a lender and a borrower. It can be also called as leverage in the world of business.

Deficit means more outlays than earnings.

Types of deficit in general sense embody: fiscal deficit, trade deficit, etc.

Primary deficit is the difference between a government’s outlays for a particular time-frame and government tax revenues for a particular time-frame. Mathematically, as under:

Primary deficit = Gt1- Tt1

Where Gt1= government’s spending on goods and services for the current year.

Tt1= government’s tax revenues for the current year.

Take for insistence that the government has been holding an old debt since the last year, so, the last year’s debt = Dt0 and that does mean, they got some interest payments on the last year’s debt= Dt-1* R (rate of interest).

The total loss and expenses means the addition of primary deficit +interest payments+ Dt0

SIMPLE EXPLAINATIONS ON HOW DEBT & DEFICIT BECOME ON & OFF BALANCE SHEET ITEMS

State 1     Explains How Deficit Gets Its Place On The Balance Sheet.

 Assumptions:

• No debt bought in the last year(000)
• No coupon in the last year due to no debt bought in the last year(000)
• Last year’s capital brought forward( INR1000)
• Government has decided to use its total existing assets for its usual economic and non economic activities & it believes the available assets are enough for this fiscal purpose.
• Government believes that the total assets worth INR 1000 are enough to carry out its must-do activities comfortably, until then it won’t borrow. This is a vital assumption.
• Government has fixed assets valued at (INR700) that is after calculating all possible appreciations and depreciations and variable assets at (INR200) and cash (INR100)

At the end of the FY 31/12/2000, here are the results:

• Capital INR1000
• Appreciations INR 100
• Depreciations INR 90
• Variable Assets INR 100
• Cash INR50

The following is the balance sheet for the state 1.

Balance sheet as on 31/12/2000

In the state 1, the government failed to earn sufficient profits that led to, you know, deficit.

State 2     Explains How Deficit Calls For Debt To Take Its Place On The Balance Sheet.

Assumptions:

• No debt bought in the last year(000)
• No coupon in the last year due to no debt bought in the last year(000)
• Last year’s capital brought forward( INR1000)
• The government decided to buy a debt of INR50 on 1/1/2001 to meet its requirements, entirely, with the maturity of period of 2 years.
• The coupon rate is the 100% per annum as per the conditions of the lender.
• Government has decided to use its total existing assets for its usual economic and non economic activities besides the debt bought for this fiscal purpose.
• Government has the fixed assets valued at (INR710) that is after calculating all possible appreciations and deprecations and variable assets at (INR100) and cash (INR50) and the new item deficit of INR 140.

At the end of the FY 31/12/2001, here are the results:

• Capital INR1000
• Debt INR 50
• Coupon Outstanding INR 50
• Fixed Assets INR 730
• Appreciations INR 160
• Depreciations INR 140
• Variable Assets INR 220
• Cash INR 50
• Deficit INR 100

The following is the balance sheet for the state 2.

Balance sheet as on 31/12/2001

 In the state 2, the government failed to earn sufficient profits that lead to deficit and alongside a debt with its outstanding coupon.

Here, the government is assumed to have not paid the coupon amount in the FY 1/1/2001-31/12/2001.

State 3     Explains How Deficit, Debt And Coupon Are Off The Balance Sheet.

 Assumptions:

• Debt bought in the last year(INR 50)
• coupon in the last year due outstanding (INR 50)
• Last year’s capital brought forward( INR1000)
• The government decided to hold the debt of INR50 bought on 1/1/2001 to meet its requirements entirely till the 31/12/2002.
• The coupon rate is the 100% per annum as per the conditions of the lender which remains the same even in the FY 1/1/2001-31/12/2002.
• Government has decided to use its total existing assets for its usual economic and non economic activities besides the debt bought for this fiscal purpose also.
• Government has the fixed assets valued at (INR 730) that is after calculating possible appreciations and deprecations and variable assets at (INR 220) and cash (INR50) and the new item deficit of (INR 140)

At the end of the FY 31/12/2002, here are the results:

• Capital INR1000
• Debt INR 50 paid
• Coupon Outstanding INR 50 for the FY 1/1/2001-31/12/2001 paid.
• Coupon INR 50 for the FY 1/1/2002-31/12/2002 paid
• Fixed Assets INR 720
• Appreciations INR 150
• Deprecations INR 140
• Variable Assets INR 200
• Cash INR 200 left after debt and coupons payments
• Surplus INR 120

The following is the balance sheet for the state 3.

Balance sheet as on 31/12/2001

In the state 3, the government earned more than sufficient profits that lead to surplus after the payment of the debt and the coupons.

Notes for the above accounting works performed:

• No Full Disclosure Principle was adopted for the above FYs.
• Materiality Principle was adopted for the above FYs.
• Accounting Period Postulate was also used for the above FYs.

THE BOTTOM LINE IS AS UNDER:

Deficit leading to debt is possible and debt leading to deficit is also feasible; deficit not leading to debt is possible and debt not leading to deficit is also work-able.