NAME: MADHURI BHIKURAO TAWARE

CLASS: SYBCOM

ROLL NO: 451

SUBJECT: MANAGEMENT ACCOUNTING

Meaning of Working Capital:
Working capital is that part of a firm’s capital which is required to hold current assets of the
firm. Examples of current assets are raw material, semi-finished goods, finished goods,
debtors, bills receivable, prepaid expenses, cash at bank and cash in hand. The firm requires
cash to pay various expenses like wages, salaries, rent, advertising etc. current assets have a
short life span.
There is an operating cycle. Cash is used to buy raw material. Various manufacturing
expenses are incurred to convert raw material into semi-finished goods and then into
finished goods. On sale of finished goods on credit, trade debtors or bills receivable result.
On receipt of payment, trade debtors and bills receivable are converted into cash and a
cycle of working capital is completed. In case of cash sales, finished goods will directly be
converted into cash. The cash is once again used to buy raw material to start another cycle.
It can be shown by means of the following diagram: -

DEFINATION
Hoagland has defined Working Capital as the “different between the book value of
the Current Assets and the Current Liabilities”. But the term ‘current’ may mean either a
(which moves around e.g. finished goods stocks changes into debtors on sale, which in turn
changes into cash on realization).

TYPES OF WORKING CAPITAL

Working capital is of the following types:
a) Gross and Net Working Capital
b) Permanent and Temporary Working Capital
c) Balance Sheet Capital and Cash Working Capital
d) Positive and Negative Working Capital
 GROSS AND NET WORKING CAPITAL
i. GROSS WORKING CAPITAL
Gross working capital means the total Current Assets without deducting the current
Liabilities. Current assets are the assets which are meant to be converted into cash within a
year or an operating cycle. Stock of raw materials, stock of semi-finished goods, stock of
finished goods, trade debtors, bills receivable, prepaid expenses, cash at bank and cash in
hand are examples of current assets.
Gross Working Capital = Current Assets
ii. NET WORKING CAPITAL
For financing current assets, long-term funds as well as short term funds are used. Short-
term funds are provided by current liabilities i.e. claims of outsiders which are expected to
mature for payment within a year. Trade creditors, bills payable and outstanding expenses
are examples of current liabilities. Net working capital refers to the excess of current assets
over current liabilities.
Net Working Capital = Current Assets – Current Liabilities

This is the most common type of working capital. It is also known as Net Current Assets. It
indicates the amount available to meet short term dues of the concern. This concept is
useful for calculating the amount of Current Assets available to meet the Current Liabilities.
It indicates liquidity of the concern in the immediate future. Therefore, ratio analysis takes
into consideration Net Working Capital only.
PERMANENT AND TEMPORARY WORKING CAPITAL
From the point of view of the period for which capital is required, working capital can be
divided into two categories namely permanent working capital and temporary working
capital.
i. PERMANENT WORKING CAPITAL: It refers to that minimum amount of investment
in current assets that has always to be true. It is the working capital required to carry
out the minimum level of activities of the business. It is also called core working
capital, regular working capital or fixed working capital.
ii. Temporary Working Capital: It refers to that part of total working capital which is
required by a firm over and above its permanent working capital. It is required
 because the actual level of activities of the business most of the time exceeds the
minimum level of activities.

BALANCE SHEET WOKING CAPITAL AND CASH WORKING CAPITAL

i. Balance Sheet Working Capital: Usually Working Capital is determined on the basis
of the balances of Current Assets and Current Liabilities as per the Closing Balance
Sheet of a concern. Such Working Capital computed on the basis of the book values
of Current Assets and Current Liabilities is called ‘Balance Sheet Working Capital’.
Balance Sheet Working Capital shows the amount of Net Current Assets as on the
last day of accounting year of a concern. This concept helps in judging the liquidity
and solvency of a concern.
ii. Cash Working Capital: The Net Current Assets indicate the amount of funds available
to a concern if, and only if, all the Current Assets are realised at book value.
POSITIVE WORKING CAPITAL AND NEGATIVE WORKING CAPITAL
i. Positive Working Capital: When Current Assets exceed Current Liabilities the Net
Current Asset is a positive figure and hence it is called Positive Working Capital.
Positive Working Capital indicates favourable Liquidity and Solvency position of a
concern.
ii. Negative Working Capital: When Current Assets are less than Current Liabilities the
Net Current Assets is negative figure and hence is called Negative Working Capital.
IMPORTANCE OF ADEQUATE WORKING CAPITAL
The importance of Adequate Working Capital are as follows:
• Cash Discount: With adequate working capital, company can avail cash discount
from the suppliers (creditors).
• Good Credit Rating: Adequate working capital will lead to timely payment to
creditors resulting in good credit rating.
• Business Opportunities: With adequate working capital, the company is in a position
to take advantage of business opportunity by increasing production. This will result
in higher profit.
• Good ROI: Adequate working capital will increase working capital turnover, which
results in good return on investment.
• Lower Interest: The company has to pay lower rate of interest for arranging either
short-term or long-term loans due to good credit rating.
• Dividends: Sufficient funds will lead to payments of adequate dividends making the
shareholders happy and willing to bring in more capital.
• Operating Cycle: The operating cycle becomes short when there is adequate working
capital as there is regular supply of raw material from the suppliers and no break in
the production process. This results in high turnover and high profit.
• Plant Maintenance: With adequate working capital, plant and machinery and fixed
assets can be repaired, renovated, maintained or modernised in time. This result in
proper utilisation of fixed assets.