What is the difference between the current ratio and working capital?

Definition of Current Ratio

The current ratio is the proportion, quotient, or relationship between the amount of a company's current assets and the amount of its current liabilities. The current ratio is calculated by dividing the amount of current assets by the amount of current liabilities.

Definition of Working Capital

Working capital is the amount remaining after a company's current liabilities are subtracted from its current assets.

Difference between Current Ratio and Working Capital

To illustrate the difference between the current ratio and working capital, assume that a company's balance sheet reports current assets of $60,000 and current liabilities of $40,000. These amounts result in the following:

  • Current ratio is 1.5 to 1 (or 1.5:1, or simply 1.5). This is the result of dividing $60,000 by $40,000.
  • Working capital is $20,000. This is the remainder after subtracting $40,000 from $60,000.

AccountingCoach PRO contains 24 blank forms to guide you in computing and understanding often-used financial ratios. In addition, there are 24 filled-in forms based on the amounts from two financial statements which are also included.

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