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Working Capital Basis

In accounting the most common concept of funds is working capital which is defined as the excess of current assets (cash, short term or temporary investments, debtors, bills receivable, inventories, short-term prepayments and the like) over current liabilities (creditors, bills payable and other outstanding short term liabilities). The working capital is net concept; it cannot be identified with any specific asset or liability nor solely with total current assets or total current liabilities. The probable reason that changes statement has focused on working capital s the perspective it provides on the entire natural operating cycle rather than just one there of such as cash or cash plus receivables, Ronald J. Thacker has explained the logic for working capital concept of funds in the following manner. “ The most desired form of asset for any business entity is cash. The most desired form of asset for the customers is inventory. A firm acquires inventory on credit, converts into receivables, then into cash, pays its short-term creditors and them repeats the cycle again. This process itself for profitable business concerns generates working capital. Management is concerned with increasing eh velocity of this flow so that some resources may become more productive” Several advantages of the working capital concept of funds have been suggested from time to time. These include the following: (i) A funds-statement constructed on the basis of the working capital concept is readily articulated with the income statement and balance sheet. (ii) It follows closely the traditional definitions used in the financial reporting, and, therefore it is more understandable tot the users of the financial statement show are acquainted with con vent ional accounting producers. (iii) It tends to concentrate the information presented on the infrequent inter-firm transitions rather than the day-to-day transitions resulting from regular operations. (iv) It has been proposed as a means of presenting the general liquidity of the firm.

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