Calculation of Working Capital

It is calculated by subtracting the current liabilities from the current assets.

Current assets may consist of stock, debtors, prepayments cash at hand; cash at bank, etc while current liabilities include creditors, banks overdrafts, accrued expenses, etc.

Example:

The following information was extracted from the books of EGO Nigeria limited as at 31^st November 2016.

Question: Calculate the working capital of the company.

Solution: Working Capital = Current Assets – Current Liabilities

Importance of Working Capital

1. It is the capital used in meeting the day to day running expenses of an organization.
2. It is an avenue for the company to meet its immediate needs. It determines the solvency of the business.
3. It serves as a check against tying down too much money for current Assets like stock, Prepayment, etc.
4. It shows that the business is not financed by suppliers.
5. The higher the working capital, the higher the profit expected.

Evaluation Questions

1. What is capital? using the accountants, economics, and layman’s views.
2. List ten types of capital. Explain five of the above-listed capitals.
3. What is working capital?
4. State five importance of working capital to an organization.
5. Fred Amasah had the following state of affairs as at 31st December 1999.

(a) Calculate

i. The current assets of the business
ii. Its current liabilities
iii. Its working capital

(b) What is a current asset

(c) State one significance of calculating the capital. (WASSCE June, 2001)
View Answer