Ajay Mady In: Category - Capital or Equity What is the formula for working capital? formulaworking capital Share Facebook 1 Answer Voted Recent Aastha 2020-07-23T01:06:57+05:30Added an answer on July 23, 2020 at 1:06 am This answer was edited. Working capital = Current Assets – Current Liabilities I believe if you want to understand how the above formula works you will need to understand each part of this formula i.e you will first need to have a clear understanding about the concept of current assets and current liabilities. Current assets It refers to all the assets including cash and cash equivalents which are expected to be converted within a year or within the operating cycle of an entity if such entity has an operating cycle longer than a year. Current liabilities It refers to all the payables or debts which an entity expects to discharge within a year or the operating cycle of such entity provided such an entity has an operating cycle longer than a year. I understand that even though you got a rough idea of this concept you may not be confident while applying this concept hence, to relate to this concept a numerical example would be of great help. So, I believe once you have a look at the below-mentioned example you will be in a better position to comfortably apply this formula: Here, Working Capital = Current Assets – Current Liabilities = Cash in Hand + Cash at Bank + Trade Receivables + Prepaid Rent –Trade Payables – Outstanding Salaries = 5,000 + 56,000 + 64,000 + 3,000 – 20,000 – 20,000 = 128,000 – 40,000 = 88,000. It will add more value to your understanding if you also interpret the concept of Gross Working Capital and Net Working Capital. Gross Working Capital Gross working capital is a sum total of current assets of an entity. It includes Cash and Cash Equivalents Trade Receivables Inventory Short term Investments Other Marketable Securities. Net Working Capital Now, the net working capital of an entity is nothing but the working capital of an entity. In simple terms, it is a difference between current assets and current liabilities of an entity. Aastha Mehta Attachment 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerCancel replyYou must login to add an answer. Username or email* Password* Captcha* Click on image to update the captcha. Remember Me! Forgot Password?