Management Accounting Working Capital - Accounting Basics

What is Working capital?

The amount of funds or capital required to cover the operating cost is defined as Working capital. The capital required by the business is of two types:

  • Fixed Capital
  • Working Capital

The capital required for investing in the long term business investments for production in the form of purchase of fixed assets such as building, plant, machinery, furniture etc is known as Fixed Capital. Capital is permanently blocked by investing in these assets.

The capital required for short term reason such as purchase raw material, payment of day to day needs of organization, routine business expenditure, payment of salaries, wages, taxes etc are called as Working capital. The capital required for financing the short term requirements or the current assets is referred as working capital.

What is Gross Working Capital and Net Working Capital?

The investment in current assets is known as Gross working capital and the difference between the current assets and current liabilities is known as Net working capital, which can be either positive or negative.

NET WORKING CAPITAL
(A) Current Assets
Cash in hand XXX
Cash at Bank XXX
Sundry Debtors XXX
Bills receivables XXX
Inventories of Stock
Raw Material XXX
Work–in-Process XXX
Finished Goods XXX
XXX
Short Term Investments XXX
Prepaid Expenses XXX
Accrued Incomes XXX
Total Current Assets XXXXX
(B) Less: Current Liabilities
Sundry Creditors XXX
Short term Loans, advances and deposits XXX
Bank Overdraft XXX
Bills payable XXX
Provisions XXX
Expenses Payable XXX
Total Current Liabilities XXXX
Working Capital (A - B) XX

Explain the Working Capital Cycle

The cycle of working capital from generation of cash to disbursement of cash is depicted below:

Working Capital Cycle

All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd DMCA.com Protection Status

Accounting Basics Topics