Working Capital : Residue of Current Area

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
...
CURRENT LIABILITIES AND PROVISIONS
(1) Sundry Creditors
(2) Bills Payable
(3) Bank Overdraft
(4) Outstanding Expenses
(5) Unclaimed Dividends
(6) Pre received Incomes
(7) Provision for Taxation
(8) Provision for Dividends
...

13,00,000
12,00,000
5,00,000
5,00,000
20,000
2,23,000
3,00,000
4,00,000 
44,43,000 
...
CURRENT ASSETS
A. LIQUID ASSETS
(1) Cash balance on hand
(2) Bank Balance
(3) Bills Receivable
(4) Sundry Debtors
  Less: Reserve for
  Doubtful Debts
(5) Advances recoverable in cash
      or for value to be received
B. OTHER CURRENT ASSETS
(1) Stocks/Inventories
(2) Prepaid Expenses
(3) Incomes Receivable
(4) Short Term Investments
...



1,17,000

15,00,000
38,20,000


3,83,000


6,00,000
3,80,000
1,60,000
5,00,000
72,60,000 
 2,38,36,0002,38,36,000

Working Capital [= Current Assets - Current Liabilities/Provisions]

The difference between the aggregate values of the current assets and current liabilities is working capital.

From the above balance sheet,

Working Capital = Current Assets - Current Liabilities
= 72,60,000 - 44,43,000
= 28,17,000

A negative value for working capital indicates that the aggregate of current liabilities is greater than the aggregate of current assets.

Working Capital is excess of Current Assets over Current Liabilities.

Since, Working Capital = Current Assets - Current Liabilities, Working capital can be interpreted as the excess of current assets over current liabilities or as the residue of the current area (after setting of current assets and liabilities).

Working Capital is that part of the Current Assets which are not financed by Current Liabilities.

Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible.

Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities.

Since Current assets in excess of current liabilities is working capital, we say
Working capital is

  • financed by non-current liabilities
  • that part of current assets which are financed by non-current liabilities.
  • not financed by current liabilities
  • that part of current assets which are not financed by current liabilities.

n~3 t~1 «Note~3_Topic~2 » n~3 t~3