MEANING AND CONCEPT OF WORKING CAPITAL

MEANING AND CONCEPT OF WORKING CAPITAL

In accounting term working capital is the difference between the current assets and current liabilities. If we break down the components of working capital we will found working capital as follows:

               Working Capital = Current Assets – Current Liabilities

Current Assets: An asset is classified as current when:

(i) It is expected to be realised or intends to be sold or consumed in normal operating cycle of the entity;

(ii) The asset is held primarily for the purpose of trading;

(iii) It is expected to be realised within twelve months after the reporting period;

(iv) It is non- restricted cash or cash equivalent.

Generally current assets of an entity, for the purpose of working capital management can be grouped into the following main heads:

(a) Inventory (raw material, work in process and finished goods)

(b) Receivables (trade receivables and bills receivables)

(c) Cash or cash equivalents (short-term marketable securities)

(d) Prepaid expenses

Current Liabilities: A liability is classified as current when:

(i) It is expected to be settled in normal operating cycle of the entity.

(ii) The liability is held primarily for the purpose of trading

(iii) It is expected to be settled within twelve months after the reporting period

 Generally current liabilities of an entity, for the purpose of working capital management can be grouped into the following main heads:

(a) Payable (trade payables and bills receivables)

(b) Outstanding payments (wages & salary etc.)

In general Working capital management is essentially managing Current Assets management of working capital arises as a part of the process of such management.

 http://www.comgurukul.com/educational-books/gst-book/