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Hello, Reader

How are you?

I hope you will be fine and doing great work.

This week’s “Accounting Guide” is about the difference between net working capital and gross working capital.

Concept description

What is Gross working capital?

Gross Working capital is the sum of current assets of a company. This amount represents the total financial resources of a company. Total financial resources are the resources available for meeting the current obligations. It can be calculated by summing-up all the current assets of the company.

But the gross working capital portrays the bounded view of the company’s financial position. Therefore, accountants also calculate net working capital.

Let’s explore what is net working capital.

What is Net working capital?

Net working capital is the difference of current assets and current liabilities. It shows the liquidity position of a company after paying the current liabilities. It is calculated by deducting current liabilities from current assets.

Where,

Current assets are the liquid assets of the company such as:

• Cash
• Cash equivalents
• Accounts receivable
• Stock inventory
• Marketable securities etc.

Current Liabilities are the short-term liabilities of a company such as:

• Accounts payable
• Short-term debt
• Dividends
• Notes payable
• Income taxes owed

Now, I know you will be asking what’s the difference between working capital and net working capital? Or are they same?

Are Net working capital and working same?

Well, Reader yes, net working capital is another name of working capital. They are used alternatively.

But, Why do we calculate gross working capital?

Accountants calculate Gross working capital because it it shows the total cash flow available for paying short-term liabilities and meeting the operating needs of a company.

Let’s have some hands-on practice and calculate both gross and net working capital.

Let’s go to Practice Exercise

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Practice Exercise Solution Hints

If you are wondering How to solve these questions????

Don’t worry!

Here are some tips to remember while solving these questions!!

Remember

• Total current assets gives the amount of gross working capital
• Increase in working capital is an outflow of cash
• Decrease in working capital is an inflow of cash

Steps to calculate working capital

1. 1. Identify current assets
2. 2. Identify current liabilities
3. 3. Calculate the difference between them

Waoowww BONUS

Keys of practice exercise

1. $375
2. $14,000
3. I- $24

II- 2020 - $248

2021- $291

III- $138

4. $49200

5. Cash outflow $400,000

It’s really hard to practice!!!

Don’t worry dear Readeryou have the entire week to work and practice these exercises. You can cross check your answers with the keys of practice exercise.

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Till then

Hira from Accounting Drive

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