Capital investment is required for a firm to function smoothly and efficiently. The money or wealth is needed to buy or equip assets that will let them make items or complete a service. The two types of capital necessary in their company venture are fixed capital and working capital. An entrepreneur can preserve a perfect balance between their assets and liabilities and strive toward earning more substantial revenue by using these two capitals.
What is Fixed Capital and how does it work ?
To put it another way, fixed capital refers to the cash used to acquire long-term assets or fixed assets. These fixed assets are the first and most important purchases a firm makes, and they are used to manufacture the final product on a continuing basis. These inexhaustible assets aren’t used or depleted in a single accounting period.
Fixed Capital Examples
Fixed capital consists of tangible and durable assets that are necessary for production and are used for a long time. Fixed capital includes items such as machinery, vehicles, and equipment, as well as plants, buildings, and other structures.
What is the definition of Working Capital ?
Working capital is the difference between current assets and current liabilities, and it represents the approximate money accessible to the firm. The assets that a corporation holds that can be liquefied within a year are referred to as current assets. The overdue payments that a corporation must make in the coming financial year are known as current obligations.
Current assets include inventories, cash on hand, debtors, and so on, whereas current liabilities include short-term loans, bank overdrafts, creditors, tax provisions, and so on.
As a result, one distinction between fixed capital and working capital is that working capital is utilised to fund an organization’s short-term business activities.
Fixed Capital vs. Working Capital: What’s the Difference?
On the basis of the following elements, the distinction between fixed and working capital may be clearly identified:
- The part of an organization’s total capital that is invested in long-term assets is known as fixed capital. Working capital is the money needed to run a business on a daily basis.
- Fixed capital investments are durable products that will stay in the firm for longer than one accounting period. The company’s working capital, on the other hand, is made up of short-term assets and liabilities.
- Fixed capital is generally illiquid since it cannot be quickly converted to cash. Working capital investments, on the other hand, may be converted into cash quickly.
- Fixed capital is used to acquire non-current assets for the firm, whereas working capital is used for short-term finance.
- The entity’s strategic objectives, which include long-term business planning, are supported by fixed capital. Working capital, on the other hand, is used for a variety of purposes.
Basis | Fixed Capital | Working Capital |
Definition | Putting money into an organization’s long-term assets. | Working capital refers to money put into a company’s current assets. |
Types of assets acquired | used to purchase non-current assets for the firm. | used to buy the company’s current assets. |
Liquidity | Fixed capital is not liquid. | Working capital is quite liquid. |
Conversion to cash | It is not feasible to convert to cash. | Can be exchanged into cash |
Objective served | Serves strategy-oriented goals | serves operational goals |
Conclusion
Capital is the primary necessity of all business organisations in order to operate. After analysing the reasons raised above, it is evident that fixed capital and working capital, collectively known as total capital. They are not inherently conflicting, but they complement each other in the sense that working capital is required to utilise the fixed assets of the firm, i.e., there is no use of equipment and machinery if raw materials are not employed for production. As a result, working capital guarantees that the company’s fixed assets are used profitably.
Frequently Asked Questions
Get answers to the most common queries related to the CA Examination Preparation.
What exactly is fixed capital?
Answer. Fixed capital is the part of a company’s total capital outlay that is spent in physical assets such as...Read full
What exactly is the working capital?
Answer. Working capital, also known as net working capital (NWC), is the difference between a company’s curren...Read full
What distinguishes fixed capital from operating capital?
Answer. A small firm need both fixed and operating capital. Fixed capital refers to the assets or investments requir...Read full
What are some instances of working capital?
Answer. Cash and cash equivalents—cash includes monies in checking or savings accounts, whereas cash equivalents a...Read full
What are the few examples of fixed capital?
Answer. Plant, machinery, vehicles, and equipment, installations and physical infrastructures, the value of land imp...Read full
