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Financial Management and Business Data Analytics · Fund Flow Statement - Preparation and Analysis

Statement of Changes in Working Capital: Format and Method

Updated 10 October 2026 · Fact-checked

The statement of changes in working capital compares each current asset and current liability at two balance sheet dates. An increase in a current asset or a decrease in a current liability increases working capital. The reverse reduces it. The net change must equal the difference in working capital between the two dates.

Understand Statement of Changes in Working Capital

Working capital is current assets minus current liabilities. In a fund flow statement, funds usually mean working capital. So you must know how much working capital changed during the year.

The statement of changes in working capital (also called the schedule of changes in working capital) lists every current asset and current liability for the previous year and the current year. It then shows the increase or decrease in each item, and the net effect on working capital.

This statement is separate from the fund flow statement itself. Changes in current items do not appear as sources or applications of funds inside the main statement. They are shown in this schedule. The net increase or decrease is then used as the balancing figure of the fund flow statement.

Think of it in two ways. If you hold more stock, debtors or cash, your working capital rises. If you owe more to creditors or bills payable, your working capital falls. The schedule just records each of these movements in the right column.

Key rules to remember

Working capital
Working capital = Current assets − Current liabilities
Calculate it for both years. Use only items classified as current.
Change in working capital
Change = Working capital (current year) − Working capital (previous year)
A positive result is an increase. A negative result is a decrease.
Effect of a current asset
Increase in current asset → increases working capital; decrease in current asset → decreases working capital
Applies to stock, debtors, cash, bank, bills receivable, prepaid expenses and similar items.
Effect of a current liability
Increase in current liability → decreases working capital; decrease in current liability → increases working capital
Applies to creditors, bills payable, outstanding expenses, and other current liabilities.
Check total
Total increases in working capital − Total decreases in working capital = Net change in working capital
This must match the difference in the two years' working capital.

How to solve Statement of Changes in Working Capital questions

Follow the same layout every time. It keeps the schedule neat and makes errors easy to spot.

  1. 1Read the balance sheets and list only current assets and current liabilities. Check the notes for any item such as a current portion of a loan or proposed dividend, and treat it as the question instructs.
  2. 2Draw columns: Particulars, Previous year, Current year, Effect on working capital (Increase), Effect on working capital (Decrease).
  3. 3Write current assets first: stock, debtors, bills receivable, prepaid expenses, cash and bank. Then write current liabilities: creditors, bills payable, outstanding expenses and others.
  4. 4Total current assets and total current liabilities for both years. Find working capital for each year.
  5. 5For each item, find the change. Place it in the Increase column or the Decrease column using the rule for assets and liabilities.
  6. 6Total the Increase and Decrease columns. Find the net change in working capital.
  7. 7Check the net change against the difference between the two years' working capital. State clearly whether working capital has increased or decreased.

Quickest way: Assets up, liabilities down

When to use it: Use this when the question gives two simple balance sheets and asks only for the schedule.

  1. Compute the change in each item as current year minus previous year.
  2. For assets, put a rise in the Increase column and a fall in the Decrease column.
  3. For liabilities, flip it: a rise goes in the Decrease column and a fall in the Increase column.
  4. Add both columns. The gap between them is the net change. Confirm it equals the working capital difference.

Common mistakes in Statement of Changes in Working Capital

  • Putting an increase in current liabilities in the Increase column.

    Students follow the direction of the item rather than its effect on working capital.

    Fix: Remember that more liabilities mean less working capital. Put it in the Decrease column.

  • Including non-current items such as fixed assets, investments or long-term loans.

    Students copy the full balance sheet without classifying items.

    Fix: Take only current assets and current liabilities. Everything else goes to the fund flow statement.

  • Treating bank overdraft or provision for tax and proposed dividend wrongly.

    The treatment depends on the question's instructions, and students ignore them.

    Fix: Read the question. If it says to treat proposed dividend or tax provision as non-current, leave them out of the schedule. Otherwise treat them as current liabilities.

  • Showing the total of the schedule without checking it against working capital.

    Students rush and skip the proof.

    Fix: Always compute working capital for both years and compare. A mismatch means an arithmetic or placement error.

  • Subtracting in the wrong direction, previous year minus current year.

    Students are used to subtracting the smaller figure from the larger.

    Fix: Always take current year minus previous year, then decide whether the movement is an increase or decrease in working capital.

Worked examples

Example 1

The balance sheet extracts of Sharma Traders Ltd. are as follows. 31 March 2025: Stock ₹1,20,000; Debtors ₹80,000; Cash ₹20,000; Creditors ₹70,000; Outstanding expenses ₹10,000. 31 March 2026: Stock ₹1,50,000; Debtors ₹70,000; Cash ₹35,000; Creditors ₹90,000; Outstanding expenses ₹5,000. Prepare a statement of changes in working capital.

Show the solution
  1. Current assets 2025: 1,20,000 + 80,000 + 20,000 = ₹2,20,000. Current liabilities 2025: 70,000 + 10,000 = ₹80,000. Working capital 2025 = ₹1,40,000.
  2. Current assets 2026: 1,50,000 + 70,000 + 35,000 = ₹2,55,000. Current liabilities 2026: 90,000 + 5,000 = ₹95,000. Working capital 2026 = ₹1,60,000.
  3. Stock rises by ₹30,000: increase in working capital. Debtors fall by ₹10,000: decrease. Cash rises by ₹15,000: increase.
  4. Creditors rise by ₹20,000: decrease in working capital. Outstanding expenses fall by ₹5,000: increase.
  5. Total increases = 30,000 + 15,000 + 5,000 = ₹50,000. Total decreases = 10,000 + 20,000 = ₹30,000. Net increase = ₹20,000.
  6. Check: 1,60,000 − 1,40,000 = ₹20,000. It matches.

Answer: Working capital increased by ₹20,000, from ₹1,40,000 to ₹1,60,000.

Example 2

Extracts from the balance sheets of Iyer Industries Ltd. are: 31 March 2025: Stock ₹2,00,000; Debtors ₹1,50,000; Bills receivable ₹30,000; Cash ₹40,000; Creditors ₹1,10,000; Bills payable ₹50,000. 31 March 2026: Stock ₹1,70,000; Debtors ₹1,80,000; Bills receivable ₹20,000; Cash ₹25,000; Creditors ₹90,000; Bills payable ₹70,000. Find the change in working capital.

Show the solution
  1. Current assets 2025: 2,00,000 + 1,50,000 + 30,000 + 40,000 = ₹4,20,000. Current liabilities 2025: 1,10,000 + 50,000 = ₹1,60,000. Working capital 2025 = ₹2,60,000.
  2. Current assets 2026: 1,70,000 + 1,80,000 + 20,000 + 25,000 = ₹3,95,000. Current liabilities 2026: 90,000 + 70,000 = ₹1,60,000. Working capital 2026 = ₹2,35,000.
  3. Stock falls ₹30,000: decrease. Debtors rise ₹30,000: increase. Bills receivable fall ₹10,000: decrease. Cash falls ₹15,000: decrease.
  4. Creditors fall ₹20,000: increase. Bills payable rise ₹20,000: decrease.
  5. Total increases = 30,000 + 20,000 = ₹50,000. Total decreases = 30,000 + 10,000 + 15,000 + 20,000 = ₹75,000. Net decrease = ₹25,000.
  6. Check: 2,35,000 − 2,60,000 = −₹25,000. It matches.

Answer: Working capital decreased by ₹25,000, from ₹2,60,000 to ₹2,35,000.

Exam tips

  • Draw the five-column layout at the start. Neat columns earn presentation marks and prevent placement errors.
  • Always show working capital for both years and the final check. Examiners look for the net change tallying.
  • Read the notes for items such as proposed dividend, provision for tax or bank overdraft. Follow the question's instruction on their classification.
  • In the MCQ section, expect questions like which item increases working capital. Apply the asset-up, liability-down rule rather than recalculating everything.
  • Carry the net increase or decrease to the fund flow statement as the balancing figure, and state its direction clearly.

Practice questions from Fund Flow Statement - Preparation and Analysis

Statement of Changes in Working Capital in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Statement of Changes in Working Capital: frequently asked questions

Is the statement of changes in working capital part of the fund flow statement?

It is a supporting schedule prepared alongside the fund flow statement. It shows how each current item moved. Its net result is used as the balancing figure in the fund flow statement.

Does an increase in debtors increase working capital?

Yes. Debtors are a current asset, so an increase raises working capital. An increase in creditors, a current liability, lowers it.

Should cash and bank balances be included in the schedule?

Yes, in the usual working capital approach to funds. Cash and bank are current assets, so their changes are included. Check the question if it asks for a different treatment.

What if the schedule total does not match the working capital difference?

Recheck the column placement of liabilities first, since that is the most common error. Then verify each subtraction and the totals of current assets and current liabilities.