Overview
A Schedule of Changes in Working Capital tracks the net increase or decrease in a company’s working capital between two balance sheet dates. It focuses on changes in current assets and current liabilities, which are crucial for assessing short-term financial health.
Key Principles
| Change Type | Impact on Working Capital |
|---|---|
| Increase in Current Assets | Increase in Working Capital |
| Decrease in Current Assets | Decrease in Working Capital |
| Increase in Current Liabilities | Decrease in Working Capital |
| Decrease in Current Liabilities | Increase in Working Capital |
Method 1: Using Only Current Accounts
Steps:
- Identify all current assets and current liabilities from comparative balance sheets.
- Calculate the increase or decrease for each item.
- Classify each change as either a source or use of working capital.
- Compute the net change in working capital.
Example (Illustrative Only)
| Particulars | 2023 (₹) | 2024 (₹) | Increase (₹) | Decrease (₹) |
|---|---|---|---|---|
| Current Assets | ||||
| Cash | 5,000 | 7,000 | 2,000 | – |
| Debtors | 20,000 | 18,000 | – | 2,000 |
| Inventory | 10,000 | 15,000 | 5,000 | – |
| Current Liabilities | ||||
| Creditors | 8,000 | 10,000 | – | 2,000 |
| Outstanding Expenses | 2,000 | 1,000 | – | 1,000 |
Total Increase in Working Capital = ₹2,000 (Cash) + ₹5,000 (Inventory) + ₹1,000 (Outstanding Exp.) = ₹8,000
Total Decrease in Working Capital = ₹2,000 (Debtors) + ₹2,000 (Creditors) = ₹4,000
Net Increase in Working Capital = ₹8,000 – ₹4,000 = ₹4,000
Method 2: Using Both Current and Non-Current Accounts
This method is used when preparing a Funds Flow Statement and includes changes in fixed assets, long-term liabilities, and equity.
Steps:
- Identify both current and non-current items.
- Calculate the changes between periods.
- Segregate them into Sources and Applications of funds.
- Compute Working Capital Change separately and match with the funds flow.
Example Funds Flow Statement
Sources of Funds:
| Source | ₹ |
|---|---|
| Funds from Operations | 7,000 |
| Issue of Shares / Long-Term Loan | 20,000 |
| Sale of Fixed Assets | 10,000 |
| Total Sources | 37,000 |
Applications of Funds:
| Application | ₹ |
|---|---|
| Purchase of Fixed Assets | 3,000 |
| Redemption of Debentures | 2,000 |
| Increase in Working Capital | 34,000 |
| Total Applications | 39,000 |
Note: Working Capital Increase = ₹82,000 – ₹48,000 = ₹34,000
Key Takeaways
- The Schedule of Changes in Working Capital complements the Funds Flow Statement.
- It reveals how efficiently the company is managing short-term assets and liabilities.
- Essential for internal analysis, cash flow planning, and stakeholder communication.