03 April 2019
It is very easy to understand. When you add some fixed asset, by purchase of machinery etc., the fixed assets (machinery account) is increased, and we call it as use of Funds. I think it is clear here. You may be aware that cash or bank are current assets. So, similar to that of fixed assets, when any cash or bank balance increase, it is use of funds. Now let us understand the term working capital. In fact, the term working capital consists of two groups viz., current assets and current liabilities. Current assets are cash, bank, inventories, advances paid, sales receivables/debtors etc. Whereas the current liabilities are outstanding payments / expenses, money received in advances, purchase payables / creditors etc., And the working capital is derivation from these two i.e. Excess of Current Assets over current liabilities (i.e. Current Assets minus Current Liabilities). Thus, any increase in cash or bank account results in increase of working capital. As it is due to increase in cash or bank (current assets), that increase in Working Capital means it is use of funds like that of fixed assets.
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