Difference Between Fixed Capital and Working Capital

For a business to run smoothly and efficiently, capital investment is needed. The capital or wealth is required to purchase or equip assets which help them manufacture products or finish a service. In their business venture, the two kinds of capital which are required are fixed capital and working capital. Using these two capitals, an entrepreneur can keep a perfect balance between their assets and liabilities and work toward generating more significant revenue. 

What is Fixed Capital?

To put simply, the funds invested in procuring long-term assets or fixed assets is known as fixed capital. These fixed assets are the initial most procurement a company does and are utilised continuously to produce the final product. These perpetual assets don’t get utilised or consumed in a single accounting period. 

Examples of Fixed Capital – 

Tangible and durable assets which are required for production and are utilised for a long period are a part of fixed capital. Machinery, vehicle and equipment, plant, buildings, etc. are examples of fixed capital. 

What is Working Capital?

Working capital is the measure of approximate funds available to the business and is represented as the difference between current assets and current liabilities. Current assets refer to the assets an organisation owns which can be liquefied within one year. Current liabilities are the outstanding payments which a company has to make in the coming financial year. 

Inventories, cash in hand, debtors, etc. are a few examples of current assets, whereas short term loans, bank overdraft, creditors, tax provisions, etc. are examples of current liabilities. 

Therefore, one difference between fixed capital and working capital is that working capital is used to meet the short-term business operations of an organisation. Mentioned below are the types of working capital. 

Basis 

Type 1

Type 2

On the basis of time

Gross working capital – It is the measure of total current assets a company possesses. 

Net working capital – It is the measure of the difference between the current assets and current liabilities. 

On the basis of a concept 

Permanent working capital – It is the measure of minimum investment needed in an organisation irrespective of any scenario or fluctuations. 

Temporary working capital – It is the excess capital available in a business environment apart from the permanent working capital. 

Do You Know? 

  • Net working capital gives an approximate idea about their business performance in the real world. 

  • A negative value for net working capital depicts that the business is in a state of loss as the amount of current liabilities exceeds the value of current assets. 

Questions to Solve 

Q1. Divide the Following into Appropriate Categories of Fixed Capital and Working Capital.

Machinery, cash, inventory, vehicles, accounts receivable, physical infrastructures, marketable securities, notes payable, accrued expenses, accounts payable. 

Q2. Define Fixed Capital and Working Capital. 

Key difference between fixed and working capital

While both fixed and working capital is important for a business’s growth, there are several differences between these two. The list created below shows some of these differences. 

  1. On the Basis of Meaning 

Fixed capital refers to the investment on fixed assets or long-term assets that a company procures. In the case of working capital, funds are utilised for procurement of current assets in the company. 

  1. It Comprises of 

Durable assets or long-lasting assets are a part of fixed capital, and they aren’t consumed in a single accounting period. Therefore, a significant difference between working capital and fixed capital is that working capital comprises current assets and liabilities and not fixed assets. 

  1. Based on the Use of the Capital 

To differentiate between fixed capital and working capital in terms of use, fixed capital is only used to purchase long-lasting assets or fixed assets like equipment, land, office space, vehicles, infrastructures, etc. Working capital is used explicitly for short term investments like the purchase of current assets or payment of current liabilities. 

  1. Based on Liquidity 

To distinguish between fixed capital and working capital based on its liquidity, consider the following points – 

  • Fixed capital is invested on assets which are permanent in an organisation and aren’t liquid. So, these are comparatively difficult to convert into liquid cash. 

  • Working capital deals with the current assets and liabilities and hence is highly liquid. Businesses can convert these into cash any time should the need arise so. 

  1. Based on Objectives 

Both fixed capital and working capital does have objectives and hence function accordingly in a business venture. While fixed capitals have strategic objectives, working capitals are used to meet the operational objectives of an organisation. 

Since fixed capital refers to the purchase of long-term assets like factories, equipment, etc., they tend to the strategic goals of the organisation. But everyday overheads are met by the liquid funds in hand and through working capital. 

Test Your Knowledge 

Q1. A company XYZ enterprise has current assets amounting at Rs.15 lakh, and its current liabilities stand at Rs.10 lakh. Determine their gross and net working capital, and if the company is accruing profit or loss. 

Answer: Gross working capital of XYZ enterprise will be- Rs.15 lakh and Net working capital of XYZ enterprise will be- Rs.5 lakh (15 – 10). Since the value of assets is higher than that of liabilities, the value of profit XYZ enterprise earns is Rs.5 lakh. 

With such concepts, students will be able to solve questions of difference between fixed capital and working capital class 9 NCERT. They can learn more about the concepts and get profound knowledge by visiting Vedantu’s websites. 

FAQ (Frequently Asked Questions)

1. What is Fixed Capital?

Fixed capital is the amount invested in meeting the strategic goals of an organisation in the purchase of long-term assets or fixed assets. These funds are usually utilised to procure the initial setup equipment and infrastructure which have perpetual use in various operations carried out in the organisation. 

2. What is Working Capital?

Working capital refers to the amount of money which is utilised to meet the operational demands or objectives of the company. To meet various day to day business operations, an organisation needs funds, and these are provided by the working capital. It usually provides an approximate insight into whether a company is undergoing loss or profit.