Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
- Positive (Current assets > Current liabilities)
- Zero (Current assets = Current liabilities)
- Negative (Current assets < Current liabilities)
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.
Current Assets = 2(Current Liabilities)
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Definition The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances. A trial balance is prepared on a particular date and not on a particular period. What does trial balRead more
Definition
The trial balance is a list of all the closing balances of the general ledger at the end of the year. Or in other words, I can say that it is a statement showing debit and credit balances.
A trial balance is prepared on a particular date and not on a particular period.
What does trial balance include?
As in each double-entry system, each account has two aspects debit and credit.
Hence the following trial balance includes:
• Debit or credit of the reporting period.
• The amount which is to be debited or credited to each account.
• The account numbers.
• The dates of the reporting period.
• The totaled sums of debits and credits entered during that time.
When we prepare a trial balance from the given list of ledger balances, these need to be included which are as follows :
The balance of all
• Assets accounts
• Expenses accounts
• Losses
• Drawings
• Cash and bank balances
Are placed in the debit column of the trial balance.
• The balances of
• liabilities accounts
• income accounts
• profits
• capital
Are placed in the credit column of the trial balance.
Importance
As the trial balance is prepared at the end of the year so it is important for the preparation of financial statements like balance sheets or profit and loss.
The purpose of the trial balance is as follows:
• To verify the arithmetical accuracy of the ledger accounts
This means trial balance indicates that equal debits and credits have been recorded in the ledger accounts.
It enables one to establish whether the posting and other accounting processes have been carried out without any arithmetical errors.
• To help in locating errors
There can be some errors if the trial balance is untallied therefore to get error-free financial statements trial balance is prepared.
• To facilitate the preparation of financial statements
A trial balance helps us to directly prepare the financial statements and then which gives us the right to not look or no need to refer to the ledger accounts.
Structure of trial balance
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