The changes in working capital are necessarily associated with the changes in on-current assets, non-current liabilities and owners(s) equity. In addition, the statement of changes in financial position can also be seen as a report that focuses on the long-term financing and investing activities of a business enterprise. It indicates how much the business enterprise spent on the acquisition of non-current assets and how it obtained the financial wherewithal (means or resources) to do so.

In preparing a statement of changes in financial position, it is convenient to divide all business transitions into following three categories:

1.    Transitions Affecting only Current Assets or/and Current Liabilities Accounts.
In such transitions only components of working capital are affected but the net amount of working capital remains unaffected. For example when cash is increased as a result of collection from debtors or bills receivable or when creditors are paid in cash or converted into bills payable, there is no increase in net working capital. Similarly there is no increase in net working capital when inventories are purchased on credit resulting in an increase in one current asset and a corresponding increase in one current liability, i.e. creditor or bills payable. Thus the transitions which shift within the working capital structure (i.e., current assets and current liabilities) by equal amounts do not increase or decrease working capital.

2.    Transitions Affecting Current and Non-Current Items. These transitions cause either an increase or decrease in the amount of working capital. Cash is a current asset while debentures and share capital for case will increase a current asset (i.e., cash) and a non-current liability account (i.e., debentures or share capital). On the other hand, the working capital is reduced by the redemption of long-term-debts or by purchase of fixed assets for cash.

3.    Transactions Affecting Only Non-Current Items. In these Transitions no working capital account is affected: only non-current asset, non-current liability or owner(s)’ equity accounts are increased or decreased. The entry to record depreciation is an example of such a taxation. Other transitions in this category such as the issuance of share capital or debenture sin exchange transitions and are viewed as both a source and use of working capital but do not change the amount of working capital.

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