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What is the difference between the current ratio and working capital?

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posted Jul 28 by Abu Anam

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1 Answer

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The current ratio is the proportion (or quotient or fraction) of the amount of current assets divided by the amount of current liabilities.

Working capital is not a ratio, proportion or quotient, but rather it is an amount. Working capital is the amount remaining after current liabilities are subtracted from current assets.

To illustrate the difference between the current ratio and working capital, let's assume that a company's balance sheet reports current assets of $60,000 and current liabilities of $40,000. The company's current ratio is 1.5 to 1 (or 1.5:1, or simply 1.5) resulting from dividing $60,000 by $40,000. The company's working capital is $20,000 which is the remainder after subtracting $40,000 from $60,000.

AccountingCoach PRO contains 24 blank forms to guide you in computing and understanding often-used financial ratios. In addition, there are 24 filled-in forms based on the amounts from two financial statements which are also included.

answer Jul 29 by Ramesh Gowda
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