The differences between working capital and depreciation.
We will describe two financial terms in the project, working
capital, and depreciation.
- Working capital.
Working capital is calculated by current assets minus
current liabilities for an organization. This is a finance term and is used as
the amount of money available to invest in a company.
Assets include liquid money, properties, shares, and any
other investment that can be used.
Liabilities are actual deaths of a company, there can be retail
fees, payments to the suppliers, salaries will be paid to employees, etc.
- Depreciation.
Depreciation is a large asset. For example, equipment,
vehicles, etc. purchased by a company and lose value over time.
For instance, you bought a brand-new car now, will it be in
the same value after five years? Of course not. The value of the car will
decrease over time, and this is called depreciation.
In order to calculate the assets for a company, depreciation
is taken into account because tools, vehicles, equipment, etc. that will be
purchased now will not be able to be sold with the same value after some time.
- How is depreciation calculated?
There are two common models used to calculate the
depreciation:
1- Straight-line depreciation.
In straight-line depreciation, we assume that the same
amount of depreciation is taken each year.
2- Accelerated depreciation.
The value of a tool, equipment, etc. depreciates faster than
the straight line. Depreciation is higher during the first years or periods in
accelerated depreciation.
- Example for two depreciation calculation models.
Imagine that a company purchased a bulldozer in order to use
in a construction project. The purchased amount is $ 300000, this bulldozer
will lose its value over time. The below figure shows how depreciation will
happen in a straight line and accelerated depreciation models:
The blue line represents the straight-line deprecation, each
year $ 30000 is depreciated from the value of the bulldozer.
The red line represents accelerated depreciation,
depreciation is higher during the first years and lower in the last years. The
depreciation amount is $ 80000, 60000, 40000, and 100000 respectively.