A:

Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation is the allocation of the value of investment assets over predetermined periods of time during an asset's usable, economic life. Certain working capital such as inventory and accounts receivable may lose value or even be written off sometimes, but how that is recorded does not follow depreciation rules. The value of working capital should be evaluated over time to ensure no devaluation occurs, as continuous operations require enough working capital in place.

Expensing Vs. Depreciation

In accounting, some purchases can be expensed all at once in one accounting period, while others must be depreciated over several accounting periods. Expensing and depreciation are two different ways of attributing appropriate cost contributions to relevant accounting periods.

Operating inputs, including working capital, are consumed during an operating cycle and should be totally expensed as one-time costs to match the revenue they help generate in the period. A machine as a fixed asset is to be used, but not entirely consumed, during the same operating cycle and should be partially depreciated to account for only the usage so far as the appropriate costs. Thus, working capital as current assets can only be expensed immediately, but not depreciated over time.

Working Capital Devaluation

Unlike how fixed assets lose their value to depreciation over time, working capital may also lose value when some assets have to be marked to market where an asset's price is below its original cost, and others are not salvageable. Two common examples involve inventory and accounts receivable.

Inventory obsolescence can be a real issue in operations. When that happens, the market for the inventory has priced it lower than the inventory's initial purchase value as recorded in the accounting books. To reflect current market conditions and use the lower of cost and market method, the inventory is marked down, resulting in a loss of value in working capital.

Some accounts receivable may become uncollectible at some point and have to be totally written off from the books, another loss of value in working capital. As such losses in current assets reduce working capital below its desired level, it may take longer-term funds or assets to replenish the current-asset shortfall, a costly way to finance additional working capital.

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