# Working Capital in Accounting

The working capital, also known as net worth capital is the money that a company needs for managing it’s short term expenses. It is calculated as a difference between an organisationâ€™s current assets and its current liabilities. Working capital is a measure of the operational efficiency, liquidity and short-term financial health or solvency of the company.

The worthiness of an organisationâ€™s working capital is subject to the industry in which it engages, its link with its suppliers and customers. Few other factors to be considered are:

• Current Assets and how fast it can be liquidated-Â If the companyâ€™s assets are liquid cash and cash equivalents, a little working capital is sufficient. But if the current assets have slow-moving items, then a large amount of working capital is required.
• Type of companyâ€™s sales and how customersâ€™ pay-Â If a company is into online sales and the customerâ€™s pay with a credit card option. At the time of payment, only a small amount of working capital is enough. But if a company has a credit duration of 60 days and the suppliers should be paid in 30days, then the company requires a large amount of working capital.
• No borrowing and approved credit line-Â This point helps the company to utilise a small amount of working capital.

## Working Capital Formula:

Working capital = Current Asset – Current Liabilities

Example of Working Capital

XYZ Company Current Assets:

• Fund in the bank: â‚¹1,00,000
• Pending accounts receivables: â‚¹4,00,000
• Inventory: â‚¹5,00,000

Total current assets = â‚¹10,00,000

XYZ Company Current Liabilities:

• Pending accounts payable: â‚¹3,00,000
• Temporary debt due payments for this year: â‚¹30,000
• A section of expended due debt for this year: â‚¹25,000
• Other accrued expenses for this year (e.g. rent, permanent salary, etc.): â‚¹4,00,000

Total current liabilities = â‚¹7,55,000

Working Capital of XYZ Company= Current Assets â€“ Current LiabilitiesÂ Â

= â‚¹10,00,000 â€“ â‚¹7,55,000

= â‚¹2,45,000

The above mentioned is the concept, that is elucidated in detail about â€˜What is working capital in accounting?â€™ for the Commerce students. To know more, stay tuned to BYJUâ€™S.