Q.Distinguish between fixed capital and working capital.
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Start your 14-day free trial to unlock the full solution →Fixed capital serves the long-term, permanent asset needs of a company, whereas working capital serves its short-term, day-to-day operating needs. They differ in purpose, nature, sources of finance, and how quickly they circulate.
Every company needs two kinds of capital to run its business. Understanding the difference helps a company plan how much money to raise and from which source.
Fixed capital is the portion of total capital invested in fixed or permanent assets such as land, buildings, plant, machinery and furniture. These assets are used repeatedly over many years to produce goods and services and are not meant for resale.
Working capital is the portion of capital used to meet the recurring, day-to-day expenses of the business, such as purchase of raw materials, payment of wages, and maintaining stock, debtors and cash. It keeps operations running smoothly between the time money is spent and the time sales revenue comes back.
| Basis | Fixed Capital | Working Capital |
|---|---|---|
| Meaning | Capital invested in permanent/fixed assets | Capital invested in current assets and day-to-day needs |
| Purpose | To acquire long-term assets | To meet routine operating expenses |
| Nature | Fixed and permanent | Circulating and constantly changing |
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