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What will cause a change in net working capital?

Author:
Harold Averkamp, CPA, MBA

Definition of Net Working Capital

Net working capital, which is also known as working capital, is defined as a company’s current assets minus itscurrent liabilities.

Examples of Changes in Working Capital

If a company’s owners invest additional cash in the company, the cash will increase the company’s current assets with no increase in current liabilities. Therefore working capital will increase.

If a company obtains a long-term loan to replace a current liability, current liabilities will decrease but current assets do not change. Therefore working capital will increase.

If a company uses its cash to pay for a new vehicle or to expand one of its buildings, the company’s current assets will decrease with no change to current liabilities. Therefore working capital will decrease.

If a company sells merchandise for $50,000 that was in inventory at a cost of $30,000, the company’s current assets will increase by $20,000. If no other expenses are incurred, working capital will increase by $20,000.

If a company borrows $50,000 and agrees to repay the loan in 90 days, the company’s working capital is unchanged. The reason is that the current asset Cash increased by $50,000 and the current liability Loans Payable increased by $50,000.

If a company collects $30,000 of its accounts receivable, there is no change in working capital since the current asset Cash increased, and another current asset Accounts Receivable decreased.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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