Q.Distinguish between fixed capital and working capital.
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Start your 14-day free trial to unlock the full solution →Both are essential funds of a company, but fixed capital is used to acquire durable, long-term assets while working capital keeps the routine operations running. They differ in purpose, period, sources, liquidity and the factors that decide their amount.
Every business needs two kinds of finance. Fixed capital is the portion of a company's total capital invested in acquiring permanent or long-term assets such as land, buildings, plant, machinery, furniture and vehicles. This investment is not meant for resale; it stays in the business for a long time and helps produce goods and services year after year. Working capital is the capital required for carrying on the routine, day-to-day activities of the business — buying raw materials, paying wages, meeting overheads and holding stock and receivables until cash is collected.
The key differences can be set out as follows:
| Basis | Fixed Capital | Working Capital |
|---|---|---|
| Meaning | Funds invested in permanent, long-life assets | Funds needed for day-to-day operations |
| Purpose | To purchase fixed assets (land, plant, machinery) | To meet recurring expenses (raw material, wages) |
| Period of use | Long term (blocked for many years) | Short term (keeps circulating) |
| Liquidity | Low — cannot be converted into cash quickly | High — assets are easily converted into cash |
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