Should working capital be negative or postive?

Question

what happens to working capital when the firm pre-pays rent expense (accrued expense i guess)?

i said it increase because by firm using money to pay ae, the cash becomes negative and therefore working capital becomes positive, but want to confirm with people

Answer 1

Pre-paids are a part of working capital, they are a current asset. Pre-paids are expensed over future periods. Since Pre-paids are a current asset there is no change in working capital - you are reducing cash, however, you are increasing pre-paids, so the end result is the same. Working capital stays the same, only the amounts in the two current asset accounts change.

Answer 2

Think of it this way.

Working capital is money that is available to the business.

Prepaying rent reduces the amount of money available.

To answer your question.  Working capital should be positive.  In fact if it isn't the business cannot meet its obligations and is, in all probability, bankrupt.

Hope this helps

Jerry-the-bookkeeper