Classification of Working Capital¶

1. On the Basis of Concept:¶

Working capital can be categorized based on the accounting concept into two types:

Gross Working Capital:
- Definition: This is the total capital invested in the current assets of an enterprise.
- Examples of Current Assets :
  - Cash in hand and bank balances.
  - Bills receivable.
  - Short-term loans and advances.
  - Prepaid expenses.
  - Accrued incomes.
Net Working Capital:
- Calculation: Net Working Capital = Current Assets - Current Liabilities.
- Positive vs. Negative Working Capital:
  - Positive: When current assets exceed current liabilities.
  - Negative: When current liabilities are more than current assets.
- Examples of Current Liabilities:
  - Bills payable.
  - Sundries debtors.
  - Accrued expenses.
  - Bank overdraft.
  - Provision for taxation.

Working capital is also classified based on its usage over time:

Permanent or Fixed Working Capital:
- Definition: This is the minimum amount required to ensure effective utilization of fixed facilities and maintain the circulation of current assets.
- Importance: It ensures that the company has enough resources to continue its operations without interruption.
Regular Working Capital:
- Purpose: This capital is necessary to ensure the continuous circulation of current assets from cash to inventories, then to receivables, and back to cash.
- Cycle Management: It is crucial in managing the operational cycle of converting cash into goods and back into cash.
Reserve Working Capital:
- Definition: This is the additional amount over the regular working capital.
- Purpose: It serves as a cushion for contingencies such as strikes, price rises, depressions, etc.
- Significance: It provides financial stability during unforeseen financial requirements.

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