Comparison Table: Fixed Capital vs Working Capital with Examples
In Commerce, understanding the distinction between fixed capital and working capital is essential for analysing how businesses manage their finances, assets, and daily operations. Both concepts are fundamental for students of Accounting, Economics, and Business Studies, as they relate directly to business sustainability and growth. Below, you will find carefully structured explanations, practical examples, formulas, key comparisons, and application tips that clarify these concepts step by step.
What is Fixed Capital?
Fixed capital refers to the funds a business invests in acquiring long-term assets essential for its operations. These assets are not intended for immediate resale and provide benefits over multiple accounting periods. Fixed capital commonly includes land, buildings, plant and machinery, vehicles, furniture, and other equipment used regularly in producing goods or services. These resources are not easily converted into cash and typically remain within the business for several years.
What is Working Capital?
Working capital is the money a business uses to manage its everyday financial needs. It is calculated as the difference between the firm’s current assets (such as cash, inventory, and receivables) and its current liabilities (like payables, bank overdrafts, and short-term loans). Working capital reflects a company’s ability to pay off its short-term obligations, replenish inventory, and manage daily expenses such as wages and utilities.
Key Differences Between Fixed Capital and Working Capital
| Basis | Fixed Capital | Working Capital |
|---|---|---|
| Definition | Funds invested in long-term assets for ongoing operations. | Funds available for day-to-day operations. |
| Kinds of Assets Acquired | Used to purchase non-current assets (e.g., machinery, land, equipment). | Used to obtain current assets (e.g., inventory, cash, receivables). |
| Liquidity | Not liquid; cannot be quickly converted to cash. | Highly liquid; easily converted to cash. |
| Conversion | Cannot be converted into cash or kind immediately. | Can be converted into cash or kind immediately. |
| Accounting Period | Benefits extend beyond one accounting period. | Benefits for less than one accounting period. |
| Objective | Supports strategic, long-term business goals. | Fulfils operational, short-term business needs. |
| Examples | Land, plant, machinery, buildings, vehicles, furniture. | Cash, inventory, accounts receivable, short-term loans. |
Examples of Fixed and Working Capital
- Fixed Capital: A company purchases machinery worth ₹500,000 for its factory. This machinery will be used constantly for several years and is not meant for immediate resale.
- Working Capital: A business maintains ₹200,000 in inventory and has ₹60,000 in cash to pay wages and suppliers within the month.
Formulas and Calculation Methods
- Working Capital = Current Assets – Current Liabilities
- Example: If a business has current assets of ₹300,000 and current liabilities of ₹120,000, then
Working Capital = ₹300,000 – ₹120,000 = ₹180,000
Practical Approach: Distinguishing Between Fixed and Working Capital
- Look at the expected duration of an asset’s use. If it benefits the company for many years, it is usually part of fixed capital.
- If the asset is consumed, sold, or converted into cash within one year, it is part of working capital.
- Fixed capital supports the infrastructure and productive capacity of the business, while working capital enables the business to function smoothly on a daily basis.
Why Both Types Matter in Business
A business cannot function with only fixed capital. Even with the best equipment and buildings, operations will stall without enough money for raw materials, salaries, or bill payments. Conversely, having only working capital with no productive assets prevents growth. Both types work together: fixed capital allows production, and working capital keeps production and sales running smoothly.
Sample Comparison Table for Quick Revision
| Criteria | Fixed Capital | Working Capital |
|---|---|---|
| Use/Objective | Long-term, strategic goals | Short-term, operational needs |
| Conversion to Cash | Very difficult/impossible quickly | Very easy/quickly possible |
| Accounting Period | More than one year | Within one year |
Practice Questions
- Classify the following as fixed capital or working capital: (i) Office Building (ii) Debtors (iii) Equipment (iv) Raw Materials
- Calculate the working capital for a business with current assets of ₹150,000 and current liabilities of ₹62,000.
Learn More and Next Steps
- Explore more detailed concepts in Accounting resources and topic-wise study guides.
- Practice additional questions to strengthen your understanding of asset classification and financial management.
- Consider joining live classes or discussion groups for interactive learning.
FAQs on Difference Between Fixed Capital and Working Capital Explained
1. What is the main difference between fixed capital and working capital?
The main difference between fixed capital and working capital is their usage and time frame:
- Fixed capital refers to funds invested in long-term assets like machinery, buildings, or vehicles, which are essential for establishing a business.
- Working capital is the capital used to run daily operations, such as cash, inventory, and receivables, and is usually held for a short period.
2. What are some common examples of fixed capital?
Examples of fixed capital include:
- Land and buildings
- Plant and machinery
- Equipment
- Furniture and fixtures
These are long-term assets used repeatedly in the production process.
3. What are some common examples of working capital?
Examples of working capital are:
- Cash in hand and at bank
- Raw materials
- Finished goods inventory
- Accounts receivable (debtors)
These assets are easily converted into cash within a short period and are used in the daily course of business.
4. Why is working capital important for a business?
Working capital is essential for meeting short-term financial obligations and ensuring smooth daily operations:
- It maintains liquidity to pay suppliers, employees, and bills.
- Adequate working capital helps avoid interruptions in production and sales.
- It supports operational activities and helps manage unexpected expenses.
5. What is the formula for calculating working capital?
The standard formula for working capital is:
Working Capital = Current Assets − Current Liabilities
This formula helps determine the short-term financial health of a business.
6. How is fixed capital shown in a company's balance sheet?
Fixed capital appears as:
- Non-current assets or fixed assets section of the balance sheet.
Examples include property, plant, equipment, vehicles, and other assets held for long-term use in business.
7. Can working capital be negative? What does it mean?
Yes, working capital can be negative if current liabilities exceed current assets.
- Negative working capital indicates the business may struggle to pay off short-term debts.
- It reflects potential liquidity issues and can hinder daily operations.
8. What is the impact of insufficient fixed capital on business operations?
Insufficient fixed capital can lead to:
- Inability to acquire or maintain essential long-term assets
- Reduced production capacity and operational inefficiency
- Limitations in business growth and competitiveness
9. How do fixed capital and working capital work together in a business?
Both types of capital are vital and complement each other:
- Fixed capital provides the long-term infrastructure needed for production.
- Working capital ensures that daily operating costs are met.
Proper balance is necessary for smooth and successful business functioning.
10. What kinds of assets are considered non-current and current in accounting for capital?
Non-current (fixed) assets: Land, buildings, machinery, vehicles, furniture (held for more than one year).
Current assets: Cash, inventory, short-term investments, receivables (expected to be used, sold, or converted into cash within a year).
11. What are the main features of fixed capital?
Main features of fixed capital include:
- Long-term investment in resources
- Low liquidity and slow conversion to cash
- Used repeatedly for several years
- Essential for basic business infrastructure
12. What happens if a business has excessive working capital?
Excessive working capital can have drawbacks:
- Funds get tied up in current assets, reducing profitability
- Opportunity cost as those funds could be invested elsewhere
- May indicate inefficient management of inventory or receivables
