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Discuss the criteria for calculating capital changes. Provide a specific example.

Discuss the criteria for calculating capital changes. Provide a specific example.

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Answer #1

Criteria for calculating changes in capital:

The difference in net working capitals reflects the adjustment of the enterprise's net working capital from one period as opposed to the other measured accounting period, to ensure that the organization retains enough working capital in each accounting cycle and ensure that there is no lack of funds.

Changes in Capital = Current Year's Working Capital – Previous Year's Working Capital

Formula for calculating Working Capital is : Current Assets - Current Liabilities

Example:

Year 2019

The Current Assets of ABC Co. was $3100 ( Accounts Receivable - $1900, Prepaid Expense - $500, Inventory - $700)

The Current Liabilities of ABC Co. was $2100 (Accounts Payable - $700, Short term loans - $900, Taxes payable - $500)

Working Capital = $3100 - $2100 = $1000

Year 2020

The Current Assets of ABC Co. was $4050 ( Accounts Receivable - $2800, Prepaid Expense - $500, Inventory - $750)

The Current Liabilities of ABC Co. was $3025 (Accounts Payable - $1000, Short term loans - $1225, Taxes payable - $800)

Working Capital = $4050 - $3025 = $1025

So, The Net change in Working Capital = Working Capital of Year 2020 - Working Capital of Year 2019

= $1025-$1000

= $25

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