The following items appear in the balance sheet of Jain Traders:
| Item | Rs. lakh |
|---|---|
| Cash at bank | 4 |
| Debtors | 6 |
| Inventory | 8 |
| Prepaid expenses | 2 |
| Machinery | 15 |
| Creditors | 7 |
| Bills payable | 3 |
| Outstanding expenses | 2 |
| Long-term loan | 10 |
Calculate its net working capital.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs. 8 lakh
Given (Rs. lakh)
Current assets: Cash at bank 4, Debtors 6, Inventory 8, Prepaid expenses 2
Current liabilities: Creditors 7, Bills payable 3, Outstanding expenses 2
Left out: Machinery 15 (a fixed asset) and Long-term loan 10 (a long-term source)
Formula: Net working capital = Current assets − Current liabilities
Current assets = 4 + 6 + 8 + 2 = 20
Current liabilities = 7 + 3 + 2 = 12
Net working capital = 20 − 12 = 8
Net working capital = Rs. 8 lakh (Rs. 8,00,000)
Option (1) Rs. 6 lakh — Incorrect. This leaves out prepaid expenses (18 − 12). Prepaid expenses are a current asset.
Option (2) Rs. 8 lakh — Correct. Current assets exceed current liabilities by Rs. 8 lakh.
Option (3) Rs. 20 lakh — Incorrect. This is the total of current assets, before current liabilities are taken away.
Option (4) Rs. 23 lakh — Incorrect. This counts machinery as a current asset (35 − 12). Machinery is a fixed asset.
NCERT (2026-27 Edition): “Working Capital … Current liabilities are those payment obligations which are due for payment within one year; such as bills payable, creditors, outstanding expenses and advances received from customers, etc. Some part of current assets is usually financed through short-term sources, i.e., current liabilities. The rest is financed through long-term sources and is called net working capital. Thus, NWC = CA – CL (i.e. Current Assets - Current Liabilities.) Thus, net working capital may be defined as the excess of current assets over current liabilities.” |