AccountingCapital Latest Questions

John Hay
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    The term negative working capital is derived from the concept of working capital. To begin with, I would like to briefly explain the meaning of working capital. In simple terms, Working Capital refers to the total amount of current assets excluding the total amount of current liabilities in a busineRead more

    The term negative working capital is derived from the concept of working capital. To begin with, I would like to briefly explain the meaning of working capital.

    In simple terms, Working Capital refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. The formula to calculate working capital is as follows:

    WORKING CAPITAL  = TOTAL CURRENT ASSETS – TOTAL CURRENT LIABILITIES

    Negative Working Capital

    In simple words, Negative working capital refers to the excess of net current liabilities over the net current assets. As the word itself suggests, a ‘negative’ working portrays a downfall in the financial position of a business and its inefficient functioning. A company is said to be facing financial difficulty and is not in a position to pay off its debts when the value of working capital is negative.

    NEGATIVE WORKING CAPITAL  = TOTAL CURRENT LIABILITIES > TOTAL CURRENT ASSETS

    EXAMPLE

    Calculate the working capital of XYZ Ltd.

    (Extract of Balance Sheet)

    PARTICULARS AMOUNT
    CURRENT ASSETS
    Cash and Cash Equivalents 36,000
    Accounts Receivables 20,000
    Stock Inventory 15,000
    Marketable Securities 35,000
    Prepaid Rent 7,000
    TOTAL CURRENT ASSETS 1,13,000
    CURRENT LIABILITIES
    Accounts Payable 15,000
    Accrued Expense 4,000
    Deferred Revenue 40,000
    Taxes Payable 50,000
    Short – Term Debt 10,000
    Interest Payable 7,000
    TOTAL CURRENT LIABILITIES 1,26,000

    Note: As we can see the total current liabilities of XYZ Ltd. are exceeding the total current assets therefore, the working capital is negative.

    Working capital = Total current assets – Total current liabilities

    = 1,13,000 – 1,26,000

    = (13,000)

    Hope this helps.

     

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