Basic Accounting Knowledge: Working Capital

Working capital: from an accounting point of view, it refers to current assets.

If the current assets are equal to the current liabilities, the funds occupied on the current assets are financing by current liabilities. If the current assets are larger than the current liabilities, the corresponding "net current assets" should be a certain portion of the long-term liabilities or owners' equity as the source of their funds.

The relationship between current assets and current liabilities is not emphasized in accounting, but only the difference between them is used to reflect the solvency of an enterprise.

In this case, it is not conducive to the management and understanding of the working capital of the financial personnel. From the financial point of view, the working capital should be the sum of the relationship between the current assets and the current liabilities. The sum is not the sum of the total amount but the reflection of the relationship. This is helpful for the financial personnel to realize that the management of working capital should pay attention to the two aspects of the current assets and the current liabilities.

The term "liquid assets" refers to assets that can be realised or used within one year or more than one year. The current assets have the characteristics of short occupation time, quick turnover and changeable cash flow.

Enterprises have more liquid assets, which can reduce financial risks to a certain extent.

The current assets on the balance sheet mainly include the following items: monetary funds, trading financial assets, notes receivable, accounts receivable, prepaid expenses and inventory.

Current liabilities refer to debts that need to be repaid within a business cycle of one year or more than one year.

Current liabilities, also known as short-term financing, have the characteristics of low cost and short repayment period. They must be carefully managed, otherwise, enterprises will face greater risks.

Current liabilities include the following items: short-term loans, notes payable, accounts payable, payable employees' salaries, taxes payable and unpaid profits.

Characteristics of working capital

In order to effectively manage the working capital of an enterprise, we must study the characteristics of working capital so as to manage it in a targeted way.

Working capital generally has the following characteristics:

1 short turnaround time.

According to this feature, working capital can be solved through short-term financing.

2 working capital such as inventory, accounts receivable and short term negotiable securities is easy to cash in, which is important for enterprises to cope with temporary capital requirements.

The number of 3 is fluctuant.

Current assets or current liabilities are easily affected by internal and external conditions, and the fluctuation of quantity is often very large.

4 sources are diverse.