Working Capital : Residue of Non-Current Area

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
Liabilities	Amount	Assets	Amount
EQUITY SHARE CAPITAL PREFERENCE SHARE CAPITAL RESERVES a) P/L Appropriation a/c (Retained Earnings) b) Share Premium c) Shares Forfeited d) Capital Redemption Reserve e) General Reserve LONG TERM LIABILITIES (1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected ...	15,00,000 9,00,000 29,57,000 14,00,000 1,74,000 12,00,000 20,00,000 54,00,000 25,00,000 14,62,000 1,93,93,000 ...	FIXED ASSETS Goodwill at cost Land and Buildings Plant and Machinery Furniture and Fittings Loose Tools Patents, Trade Marks, Copyrights Investments ACCUMULATED LOSSES Miscellaneous Expenses Goodwill (Self Generated) Patents, Trade Marks, Copyrights (unrealisable) Discount on issue of shares and Debentures ...	8,00,000 62,00,000 35,00,000 5,00,000 4,26,000 18,00,000 24,00,000 2,40,000 2,00,000 1,00,000 2,10,000 1,65,76,000 ...
	2,38,36,000		2,38,36,000

Working Capital = Non-Current Liabilities - Non-Current Assets

Total Assets = Total Liabilities
⇒ Non-Current Assets + Current Assets = Non-Current Liabilities + Current Liabilities
⇒ Current Assets - Current Liabilities = Non-Current Liabilities - Non-Current Assets
⇒ Working Capital = Fund (Non-Current) Liabilities - Fund (Non-Current) Assets

The difference between the aggregate values of non-current liabilities and non-current assets is working capital.

From the above balance sheet,

Working Capital	=	Non-Current Liabilities - Non-Current Assets
	=	1,93,93,000 - 1,65,76,000
	=	28,17,000

A negative value for working capital indicates that the aggregate of non-current assets is greater than the aggregate of non-current liabilities.

Working Capital is excess of non-current liabilities over non-current assets

Since, Working Capital = Non-Current Liabilities - Non-Current Assets, Working capital is the residue of the non-current area (after setting of non-current assets and liabilities).

Working Capital is that part of current assets financed by non-current liabilities

Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible.

Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities.

Since Current assets in excess of current liabilities is working capital, we say
Working capital is

financed by non-current liabilities
that part of current assets which are financed by non-current liabilities.
not financed by current liabilities
that part of current assets which are not financed by current liabilities.

Working Capital is that part of non-current liabilities supported by current assets

Every rupee of a liability supports a rupee of an asset. We match similar natured assets and liabilities as far as possible.

Assuming non-current liabilities > non-current assets, Non-Current liabilities support non-current assets to the extent they are available and only the surplus non-current liabilities support current assets.

Since non-Current liabilities in excess of non-current assets represent working capital, we say
Working capital is

that part of non-current liabilities supported by current assets
that part of non-current liabilities not supported by non-current assets

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