MANAGEMENT

ACCOUNTING
WORKING CAPITAL
CONCEPT

Group No. 7
Members
Name Roll no.
Madhavi Dalvi 5705
Karuna Guttedar 5718
Hemal Mhatre 5725
Aishwariya Patil 5733
Minal Patil 5735
Ashwini Rai 5742
Indira Salian 5746

Introduction
The capital used for performing day to day activities
i.e. purchases of raw material, making payment of
direct and indirect expenses , investment in stocks,
etc is called working capital.

Definition :
Hoagland has defined Working Capital as the
difference between the book value of the Current
Assets and the Current Liabilities.
The Accounting Principles Board of the
American Institute of Certified Public
Accountants has defined Working Capital as the
excess of Current Assets over Current Liabilities.

TYPES OF
WORKING
CAPITAL
a) Gross and net working capital
b)

Permanent
and
temporary
working capital
c) Balance sheet capital and cash
working capital
d) Positive and negative working
capital

GROSS AND NET WORKING

CAPITAL
1)Gross working capital : Gross working capital
means the total current assets without
deducting
CurrentCapital
Liabilities
Grossthe
Working
= Current
Asstes
(2) Net Working Capital : Net working capital
means Current

Net Working Capital = Current Assets - Current

Assets CurrentLiabilities
Liabilities
This is most common type of working capital

PERMANENT AND
TEMPORARY
(1)Permanent working capital : The minimum
amount of working capital is required to enable
the concern to operate at the lowest level of
activity Such minimum amount of working
capital is called Permanent working capital
(2)Temporary working capital : If the increase in
the level of activity is temporary or seasonal the
additional amount of working capital required is
called Temporary Working Capital

BALANCESHEET WORKING CAPITAL

AND CASH WORKING CAPITAL
(1)Balance sheet working capital : Such working
capital computed on the basis of book value of
current asset and current liabilities is called
Balance sheet working capital
(2)Cash working capital : The concept of cash
working capital makes proper adjustment in
balance sheet working capital for the (a) Debtors
include profit margins, and (b) depreciation to
arrive at the cash working capital

POSITIVE AND NEGATIVE

WORKING CAPITAL
(1)Positive working capital : When the current
asset exceed current liabilities the Net current
asset is a positive figure and hence is called
positive working capital
(2)Negative working capital : When the current
asset less than current liabilities the Net current
asset is negative figure and hence is called
Negative working capital

ESTIMATING WORKING
CAPITAL
Manufacturing Concern ( Units )
The following items are taken into consideration at
the time of ascertaining the requirement of
working capital for a manufacturing concern :
(1)Total quantity of units to be produced throughout
the year
(2)Total cost incurred on materials , wages and
overheads
(3)Information about the length of time for which
raw material are to remain in store before they
are issue for production
(4)Information about the length of production cycle

Manufacturing Concern
(5) Information about the length of sales cycle That
is period during which finished goods will remain
in the warehouse
(6) Information about the average of credit allowed
to debtors
(7) Information about the average of credit allowed
by the suppliers
(8) Information about the lag in payment of wages
and overhead

TRADING CONCERNS
(Budgets)
In case of trading concerns, details regarding
units produced, production cycle, raw material/
work in progress etc. are inapplicable normally
the details estimates are given in term of
budgeting amount rather then units

ESTIMATING
CURRENT
LIABILITIES
Current liabilities are deducted from
Current Assets to calculate Working
Capital. Higher the Current Liabilities
lower will be the Working Capital and
vice-versa.

 Creditors
Credit allowed by suppliers on
purchases of raw materials gives
rise to a current liability.
Creditors for materials are
estimated as follows :
Creditors =[units *purchase
price per unit]*[credit period
obtained]

 Outstanding Expenses
Time lag in payment of expenses like
wages, salaries or other overheads
gives rise to a Current Liability i.e.
outstanding expenses.
Outstanding Expenses are estimated
as follows:
Outstanding expenses =[total
units*Expenses per unit]*[period
of late payment]

 Advance from
customers
Some companies take advance from
customers before executing their sales
order. These are the funds available
with the company and are refundable
only if sales order is cancelled.

Illustration 1
From the following data provided by M/s. Alpha ltd. Estimate working
capital requirements for the year ended 31st March, 2014.
(a) Estimated activity/operations for the year 2,60,000 units (52 weeks).
(b) Raw material remains in stock for 2 weeks and production cycle
takes 2 weeks
(c) Finished Goods remaining in stock for 2 weeks.
(d) 2 weeks credit is allowed by suppliers.
(e) 4 weeks credit is allowed to debtors.
(f) Time lag in payment of wages and overheads is 2 weeks each.
(g) Cash & bank balance to be maintained Rs. 25000.
(h) Selling price per unit is Rs. 15.
(i) Analysis of cost per unit as follows: (1) Raw material 33 1/3 % of
sales. (2) Labour and overheads in the ratio of 6 :4 per unit. (3) Profit is
at Rs. 5 per unit.
Assume that operations are evenly spread throughout the year; Wages
and Overheads accrue similarly. Manufacturing process required feeding
of material at the beginning. Degree of work-in-progress is 50%.
Debtors are to be estimated at selling price.

Solutions:
Particulars
(
A
)
1.
(a
)
(b
)

(c
)
2.
3.
(
B
)
1.
2.

Current Assets
Stock
Raw material
Work-in-progress
- Materials
- Labour
- Overhead
Finished Goods @ COP
Debtors
Cash And Bank Balance
Total Current Assets
Less : Current Liabilities
Creditors
Outstanding Wages
Outstanding Overheads
Total Current Liabilities
Estimated Working
Capital (A-B)

Working (Units *
Rate * Period)

Amou Amou
nt
nt

(5000*Rs. 5*2
weeks)
(5000*Rs.
weeks)
(5000*Rs.
weeks)
(5000*Rs.
weeks)
(5000*Rs.
weeks)
(5000*Rs.
weeks)
(Given)

5*2
3*1
2*1

50,000
50,00
0
15,00
0
10,00
0

10*2
15*4

(5000*Rs. 5*2
weeks)
(5000*Rs. 3*2

50,00
0
30,00
0
20,00
0

75,000
1,00,0
00
3,00,0
00
25,000
5,50,0
00

1,00,0
00
4,50,0

Note : In absence of specific instruction, margin of safety is not

added.
Working Notes:
(1) Units : Yearly Production 2,60,000 Units
= Weekly Production 2,60,000/52 = 5,000 Units
(2) Cost structure
Particulars

Per
Unit

Raw Material (1/3 of sales)

5.00
Add : Labour
3.00
Overheads
2.00
Total Cost
10.00
Add : Profit
5.00
Labour & Overheads = Total Cost Raw Materials
Sales
15.00
= 10 5 = 5
Labour
= 5 * 6/10 = 3
Overheads = 5 * 4/10 = 2

Illustration 2:
From the following figures, prepare an estimate of the working
capital ;
Production
30,000 units
Selling price per unit
Rs. 10
Raw Material
60%
Direct wages
1/6th of raw material
Overheads
Twice the direct wages
Material in hand
2 months requirement
Production time
1 month
Finished goods in stores
3 months
Credit for material
2 Months
Credit allowed to customers
3 months
Average cash balance
Rs. 40,000
Wages and overheads are paid in the beginning of next month. In
Production all the material are charged in the initial stage and
wages and overheads accrue evenly.

Solution:
Cost statement
Element of
Cost

Working (Amount * Period)

Raw-Materials (10 * 60%)

Wages
(1/6 * 6)
Overheads
(2*1)
1 Total Cost
. Profit
2
. Sales
3
.

Balancing Figure
Given

Rs.

Total
Rs.
6 1,80,0
1
00
2 30,00
0
9 60,00
1
0

10 2,70,0
00
30,00
0
3,00,0
00

Working capital estimate 2013-14

Particulars
(
A
)
1.
(a
)
(b
)

(c
)
2.
3.
(
B
)

Current
Assets
Stock
Raw Material
Work-inprogress
- Materials
- Labour
- Overheads
Finished
Goods @ COP
Debtors
Cash (Given)
Total Current
Assets
Current
Liabilities
Creditors
Outstanding

Unit
P.M.

Rat Mon
e
ths

2,50
0

6.00 2

2,50
0
2,50
0
2,50
0
2,50
0
2,50
0

2,50

6.00
1.00
2.00
9.00
10.0
0

3
3

2
6.00 1
1.00 1
2.00

Rs.

Rs.

Rs.

30,00
0
15,00
0
1,250
2,500 18,75
0
67,50
0
30,00
0
2,500
5,000

1,16,
250
75,00
0
40,00
0
2,31,
000

U
O
Y
K
N
A
TH