Distinguish between the following.
1) Fixed Capital and Working Capital.
(1) Meaning: Fixed capital refers to any kind of physical capital i.e. fixed assets.
Working capital refers to current assets minus current liabilities.
(2) Nature: It stays in business almost permanently i.e. for more than one accounting year.
It stays in business for a short period of time. Thus, working capital is circulating capital.
(3) Purpose: Fixed Capital is invested in long term assets such as land, building equipment, etc.
Working capital is invested in short term assets such as cash, account receivable, inventory, etc.
(4) Sources: Fixed Capital funding can come from issuing shares, debentures, long term loans, etc.
Working Capital funding can come from short term loans, deposits, trade credit, etc.
(5) Objective of investor: Investor invests money in fixed capital to make a future profit.
Investor invests money in working capital for getting an immediate return.
(6) Risk Involved: Risk involved in fixed capital is high
The risk involved in working capital is less as compared to fixed capital.