Vinu: Hey Manu, I've been trying to understand how sundry creditors are treated in financial statements. Can you explain it to me, especially in the context of Indian laws? Also, how do sundry creditors impact the current ratio?

Manu: Sure, Vinu! Sundry creditors refer to the suppliers or vendors from whom a company has purchased goods or services on credit but has not yet made the payment. In the financial statements, sundry creditors are typically classified as current liabilities.

Vinu: I see. So, how are sundry creditors treated differently based on their payment terms?

Manu: In India, as per the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, if the sundry creditors include micro, small, or medium enterprises (MSMEs), certain specific provisions apply. MSMEs are entities engaged in the production or supply of goods or services, falling within the specified investment and turnover limits.

Vinu: What are these specific provisions for MSMEs under the MSMED Act?

Manu: According to the MSMED Act, if a company has dues payable to MSMEs, it is required to disclose such amounts separately in its financial statements. Additionally, the company is also obligated to report the dues outstanding for more than 45 days from the date of acceptance or the deemed acceptance of the goods or services.

Vinu: That's interesting. How should sundry creditors be treated in terms of their payment terms, such as those payable beyond one year or below one year?

Manu: Sundry creditors are generally considered as short-term liabilities and are classified under current liabilities on the balance sheet if the payment is due within one year. However, if the payment is expected to be made beyond one year, the sundry creditors would be classified as long-term liabilities.

Vinu: Okay, so how does the treatment of sundry creditors impact the current ratio?

Manu: The current ratio is a measure of a company's ability to meet its short-term obligations. It is calculated by dividing current assets by current liabilities. Since sundry creditors are classified as current liabilities, an increase in the amount of sundry creditors would decrease the current ratio, indicating a potential strain on the company's short-term liquidity.

Vinu: I see. So, if a company has a significant amount of sundry creditors, it could indicate a higher risk of liquidity issues in the short term.

Manu: Exactly, Vinu. High levels of sundry creditors can suggest that the company is relying heavily on trade credit for its operations, which may pose liquidity challenges if the creditors demand payment. It's important for businesses to effectively manage their payment terms and maintain a healthy current ratio.

Vinu: Thanks for clarifying, Manu. It's clear to me now how sundry creditors are treated in financial statements and their impact on the current ratio.