Q.Distinguish between Fixed Capital and Working Capital.

AP Board Class 11 Commerce papers often ask students to distinguish between these two related, but different, types of financial need.

Fixed capital is invested once in assets used for years, while working capital keeps circulating through stock, debtors and cash.

Fixed capital and working capital are the two broad categories of a firm's financial needs, and they differ in several respects.

Regarding purpose, fixed capital is invested in long-term assets such as land, buildings, plant and machinery that are used repeatedly to carry on production, while working capital is used to fund day-to-day operating expenses, raw material, stock and credit extended to debtors. Regarding duration, fixed capital is a one-time, long-term investment recovered gradually over many years through depreciation, whereas working capital is a continuous, short-term investment that keeps circulating — cash becomes stock, stock becomes debtors, and debtors become cash again within the same operating cycle.

Regarding the source of funds, fixed capital is normally raised from long-term sources such as owners' funds, retained earnings or long-term loans, while working capital is often raised from a mix of long-term funds and short-term sources such as trade credit or a bank overdraft. Regarding liquidity, fixed assets financed by fixed capital are not easily converted into cash, while the current assets financed by working capital are, by nature, meant to be converted into cash within a year.