Working capital – Difference of Current Asset and Current Liability

Current assets can be defined as an asset on the balance sheet which is expected to be sold or otherwise used up in the near future, usually within one year, or one operating cycle – whichever is longer. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses.

Current liabilities can be defined as those liabilities that are to be paid or settled in cash within a year. Examples of current liability are accounts payable for goods, outstanding expenses etc…

The difference between current asset and current liability is known as working capital which represents operating liquidity available to business. Positive working capital is required to make sure that a company is capable to carry on its business and has adequate funds to satisfy both maturing short-term debt and future operational expenses.

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