Introduction to Capital
For a business to run smoothly and efficiently, capital investment is needed. The capital or wealth is required to purchase or equip assets that 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 it 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 utilized continuously to produce the final product. These perpetual assets don’t get utilized or consumed in a single accounting period.
Examples of Fixed Capital
Tangible and durable assets which are required for production and are utilized 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 organization 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 overdrafts, 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 organization. Mentioned below are the types of working capital.
Key Differences between Fixed Capital and Working Capital
The distinction between fixed and working capital can be clearly identified on the basis of the following factors:
Fixed capital is the portion of an organization's total capital that is invested in long-term assets. Working capital is the money that is utilized to run a firm on a day-to-day basis.
Durable goods, which will remain in the business for more than one accounting period, are considered fixed capital investments. Working capital, on the other hand, is made up of the company's short-term assets and obligations.
Because fixed capital cannot be easily changed into cash, it is relatively illiquid. Working capital investments, on the other hand, are easily turned into cash.
Working capital is used for short-term funding, whereas fixed capital is utilized to purchase non-current assets for the business.
Fixed capital is used to support the entity's strategic objectives, which include long-term business planning. Unlike working capital, which serves
A business entity's essential prerequisite for doing business is capital. After analyzing the preceding arguments, it is evident that total capital includes both fixed and working capital. They are not mutually exclusive, but they do complement each other in the sense that working capital is required to utilize a company's fixed assets, such as plant and machinery if raw materials are not employed in manufacturing. As a result, working capital ensures that the company's fixed assets are used profitably.
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.
Ans: Machinery, cash, inventory, vehicles, accounts receivable, physical infrastructures, marketable securities, notes payable, accrued expenses, accounts payable.
Q2. Define Fixed Capital and Working Capital.
Ans: 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.
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 utilized for procurement of current assets in the company.
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.
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.
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 that are permanent in an organization 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.
Based on Objectives
Both fixed capital and working capital do 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 organization.
Since fixed capital refers to the purchase of long-term assets like factories, equipment, etc., they tend to the strategic goals of the organization. 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 to 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.
Ans: Gross working capital of XYZ enterprise will be Rs.15 lakh and Networking 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 the 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.
FAQs on Difference Between Fixed Capital and Working Capital
1. What is Fixed Capital?
The capital investment made in the company's long-term assets is referred to as fixed capital. It is a prerequisite of a company at its first stages, such as when starting a business or running an existing one. It is the portion of total capital that is not employed for production but is retained in operation for more than one accounting year. Its nature is practically permanent, and it exists in the form of the company's tangible and intangible assets.
2. What is Working Capital?
Working capital is a metric that measures a company's financial health and operational effectiveness. It is the result of current assets minus current liabilities, where current assets are assets that can be converted into cash within a year, such as inventories, debtors, cash, and so on, and current liabilities are liabilities that must be paid within a year, such as creditors, tax provisions, short-term loans, bank overdrafts, and so on. Working capital is utilized to fund the day-to-day operations of a company. It determines the company's short-term solvency condition.
3. What is the need for fixed capital?
The amount of fixed capital required in every firm is determined by its nature; for example, manufacturing companies, railways, telecommunications, and infrastructure corporations require more fixed capital than wholesale and retail businesses. It is utilized for things like corporate marketing, expansion, and upgrading.
Because the company's fixed capital is used to purchase non-current assets such as equipment and machinery, land and buildings, furniture and fixtures, vehicles, patents, goodwill, trademark, copyright, and so on, depreciation is levied on these assets as their value decreases over time.
4. What is the need for working capital?
Working capital is utilized to fund the day-to-day operations of a company. It determines the company's short-term solvency condition. The following criteria can be used to classify it:
On the basis of the time:
Gross Working Capital: Money invested in the company's current assets.
Current liabilities are subtracted from current assets to arrive at net working capital.
On the basis of the concept:
Permanent Working Capital: It reflects the firm's hardcore business capital, i.e. the least amount of money that needs to be invested in the firm's working capital.
Temporary working capital: Working capital that fluctuates is referred to as temporary working capital. The amount of working capital required by the company in addition to its permanent or fixed working capital.
5. Where can I find notes and questions on the difference between fixed capital and working capital?
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