Should Working Capital Include Accrued Interest?

Save

Cash flow management represents an essential skill for business success. Businesses who lack sufficient cash find themselves unable to pay their bills. Businesses with excess cash lose the opportunity to generate a return on those funds. Many investors and creditors analyze the working capital of companies to determine how well the company manages its cash flow. Working capital considers the current assets and current liabilities of the business. Companies categorize accrued interest as a current asset or a current liability depending on the specific transaction.

Working Capital

Working capital measures the liquidity of the business. The company measures working capital by subtracting the current assets from the current liabilities. Working capital represents the value remaining after all meeting all the current obligations. As the company’s working capital increases, the company’s liquidity also increases. The current ratio converts working capital into a ratio by dividing the current liabilities by the current assets.

Accrued Interest

Companies acquire accrued interest in two different ways. In one way, the company borrows money from another entity. The company pays interest on the money until it repays the full amount. In between interest payments, the company accrues interest expense. In another way, the company lends money to another entity. The company receives interest on the money until it receives the full amount from the borrower. In between interest payments, the company accrues interest income.

Current Liability

Current liabilities refer to money owed to others which the company will pay within one year. The company expects to pay the accrued interest expense, so it represents a current liability to the company. As the company owes more accrued interest expense, its working capital and current ratio decrease. As the company pays its accrued interest expense and the amount it owes decreases, its working capital and current ratio increase.

Current Asset

Current assets refer to money owed to the company from others that it expects to receive within one year. The company expects to receive the accrued interest income, so it represents a current asset to the company. As the amount of accrued interest income increases, its working capital and current ratio increase.

Related Searches

References

Promoted By Zergnet

Comments

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!