Working capital is a liability, which may be termed an assumed or nominal liability. Like capital stock it is a liability only as between the company and its stockholders. It off-sets whatever form of asset—cash or otherwise—that represents proceeds from the sale of treasury stock. The real position of working capital in the balance sheet is that of a capital liability which must be considered before any surplus available for dividends can be said to exist. Power is usually given the directors to reserve a certain amount for working capital, and even though an actual surplus may exist they have the right to off-set this with a working capital liability instead of declaring a dividend.
29. Premium on Stock. The stocks of many well-managed enterprises sell at a premium. In all such cases the amount received above the par or face value is credited to an account called premium on stock. At the end of the year this account is closed into surplus account. If any such items are standing on the books it can be used to off-set bonus account or organization expenses. It is not proper to close premium account into the current profit and loss account, for while it represents a profit, it is not earned in the regular operations of the business.
30. Reduction of Working Capital. As before stated, so long as working capital remains on the books it must be treated as a liability. Having the right to create working capital, the directors also have the right to reduce it whenever, in their judgment, the necessities of the business no longer require its maintenance in the original amount.
A reduction of working capital has the effect of increasing surplus, since surplus is increased by an increase of assets or a decrease of liabilities. To reduce working capital, the account is closed into surplus. It is perhaps necessary to say that the account should not be closed into profit and loss, since it does not represent current profits.
Suppose that in the case of the National Manufacturing Co., it is desired to reduce working capital from $50,000 to $25,000; the entry would be:
| Working capital | $25,000 | |
| Surplus | $25,000 | |
| Working capital reduced by resolution of the board of directors, January 15th, 1909. | ||
ENTRIES IN STOCK BOOKS
31. The entries in the stock books are very simple and are just the opposite of stock entries in the general or financial books of the company. When certificates of stock are issued, an account is opened in the stock ledger with each stockholder, to which is credited the stock issued to him. At the same time an account is opened in this ledger with capital stock which is debited with all stock issued, thus preserving the balance of the stock ledger. Taking the example in Art. 26, when stock is issued—
| We debit— | ||
| Capital stock | $150,000 | |
| We credit— | ||
| John Doe | $100,000 | |
| Richard Roe | 25,000 | |
| Henry Snow | 25,000 |
When the $50,000 stock is donated to the treasury to provide working capital—