Working-capital adjustment in current-cost accounting: why changes in replacement-cost conditions can alter the amount of capital a business must keep tied up in current operations.
Working-capital adjustment is a current-cost-accounting concept used to reflect how changing prices can alter the amount of capital a business must keep committed to normal operations.
The idea is that when replacement costs rise, a business may need more capital tied up in inventory, receivables, and related operating balances just to maintain the same operating capacity.
Historical-cost accounting can make reported profit look stronger than the business’s real economic position during inflationary periods. A working-capital adjustment tries to correct for that by recognizing that more capital may be required to support the same operating cycle.