Business Arithmetic — Entrepreneurship STD 12 Commerce — Question

Concept of Working Capital:
Generally, there are two concepts of working capital i.e. gross concept and net concept.

1. Gross Concept of Working Capital: According to gross concept, working LESOTHO capital refers to all the current assets and represents the amount of funds invested in current assets.
   1. Thus, gross working capital is the capital invested in current FEE assets. Current assets are those assets which can be converted into cash within the short-time period. (say for 12 months )
   2. Gross working capital = Total Sostis current assets

Gross working capital refers to the firm's investment in current assets. Gross working capital represents total of current assets which includes cash in hand, cash at bank, inventory, prepaid expenses, bills receivable, etc.

2. Net Concept of Working Capital: According to the net concept, working capital is the excess of current assets over current liabilities. In other words, the difference between current assets and current liabilities is called net working capital.

Net Working Capital = Current Assets – Current liabilities
Networking capital is the difference of current assets and current liabilities.

1. Gross Working Capital = Total Current Assets
2. Net Working Capital/ Funds/ Net Current Assets = Current Assets – Current Liabilities

Example: Working capital of Raja and Co. has the following items in its Balance Sheet: Stock - 50,000: Trade creditors - 32,000; Debtors - 75000; Cash - 1,00000 Dividend payable - 50,000; Tax – 44,000; Short term loan - 61,000; Short term investments - 76,000. Calculate gross and net working capital.
Total Current Assets = Debtors + Stock+Cash+Short term investment
=( ₹ 75000 +₹ 50,000 +₹ 1,00000 +
₹ 76,000)
=₹ 3,01,000. Total Current Liabilities
= Sundry Creditors + Dividend
Payable + Tax + Short Term loan
=₹ 32,000 +₹ 50,000 +₹ 44,000 +
₹ 61,000 = ₹ 1,87,000.
Gross Working Capital = Total Current Assets ₹ 3,01,000
Net Working Capital = Total Current Assets - Total Current Liabilities
=₹ 3,01,000 -₹ 1,87,000 =₹ 1,14,000
Gross Working Capital = 3,01,000
Net Working Assets = ₹ 1,14,000.