Difference between Capital and Working Capital

Difference between Capital and Working Capital

Capital is amount paid by the equity holder at the time of subscription. In simple way capital is the investment of the equity holder or share holder in the company. Where the working capital is the amount available to run the operations.

1.Paid up capital

The investment is represented by the heading paid up capital and it is normally reported at the top of financials statement.

2.Capital Required

Normally big portion of the Capital investment is invested in the purchase of fixed assets i.e. Machinery, building etc and remaining portion is kept for the operations.

Working Capital

1.Reporting and presentation

Working capital is not reported in the financial statement rather it is calculated for financial management. Working capital is calculated by the following formula

Working Capital = Current Asset – Current Liabilities

2.Operation

Working capital is required to support the operations. Working capital is an important measure of the operation efficiency and liquidity position of the entity.

3.Ideal Working Capital 

Working capital requirement vary business to business. Standard rule for the minimum capital requirement may be expressed in term of current ratio i.e. Current assets divided by current liabilities.

 A company must have at least 1:1 current ratio and a ratio of 2:1 is deemed to be health one for a business smooth operations.