Working Capital Formula:

Working capital is a measure of a company's liquidity and its ability to meet short-term obligations. It represents the amount of money available to a business to cover day-to-day expenses and maintain its operations. The formula for calculating working capital is:

Working Capital = Current Assets - Current Liabilities

Explanation:

Current Assets:
Current assets are the assets that a company expects to convert into cash within one year or the operating cycle of the business, whichever is longer. These assets are generally more liquid and can be easily converted into cash. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses.

Current Liabilities:
Current liabilities are the obligations that a company is expected to settle within one year or the operating cycle. These liabilities are typically short-term in nature and include accounts payable, accrued expenses, and short-term debt.

Working Capital:
Working capital is the difference between a company's current assets and current liabilities. It represents the amount of funds available to cover day-to-day operations and short-term obligations. A positive working capital indicates that a company has enough assets to cover its liabilities, while a negative working capital suggests that a company may have difficulty meeting its short-term obligations.

The formula for calculating working capital subtracts current liabilities from current assets. By subtracting current liabilities from current assets, we can determine the net amount of funds available to a business for its day-to-day operations. This net amount is known as working capital.

Example:
Let's consider an example to illustrate the calculation of working capital. Suppose a company has the following current assets and current liabilities:

Current Assets: $50,000
Current Liabilities: $30,000

Using the formula for working capital, we can calculate:

Working Capital = Current Assets - Current Liabilities
Working Capital = $50,000 - $30,000
Working Capital = $20,000

In this example, the company has a positive working capital of $20,000, indicating that it has sufficient funds to cover its short-term obligations.

Conclusion:
The formula for calculating working capital is Working Capital = Current Assets - Current Liabilities. This formula helps businesses assess their liquidity and ability to meet short-term obligations. By subtracting current liabilities from current assets, companies can determine the net amount of funds available for day-to-day operations. Positive working capital indicates a favorable financial position, while negative working capital suggests potential financial difficulties.