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Working capital

Working capital

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Published by: studyisaim on May 14, 2010
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01/28/2011

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WORKING CAPITAL
 
Meaning of Working Capital
Capital required for a business can be classified under two main categories via,1) Fixed Capital2) Working CapitalEvery business needs funds for two purposes for its establishment and to carryout its day- to-day operations. Long terms funds are required to create productionfacilities through purchase of fixed assets such as p&m, land, building, furniture,etc. Investments in these assets represent that part of firm’s capital which isblocked on permanent or fixed basis and is called fixed capital. Funds are alsoneeded for short-term purposes for the purchase of raw material, payment of wagesand other day – to- day expenses etc.
 
 These funds are known as working capital. In simple words, working capital refers tothat part of the firm’s capital which is required for financing short- term or currentassets such as cash, marketable securities, debtors & inventories. Funds, thus,invested in current assts keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence, itis also known as revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITAL
 There are two concepts of working capital:1. Gross working capital2. Net working capital The gross working capital is the capital invested in the total current assets of theenterprises current assets are those Assets which can convert in to cash within ashort period normally one accounting year.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank2) Bills receivables3) Sundry debtors4) Short term loans and advances.

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