Fixed capital

Fixed capital is an alternative term for fixed assets. These are assets held by a company which are first of all, physical in nature. However, a fixed asset is differentiated from other physical assets because it is not consumable.

Fixed assets are usually vital in the day-to-day operations of a business as they either make it possible for the business to function or allow operations, processes, and other activities to transpire smoothly. For instance, an office building, factory, and a piece of heavy equipment are considered fixed assets.

When a fixed asset is purchased, the accounting for it is different from that of a consumable item, such as a few reams of paper. The deduction for the purchase is not made immediately when the asset is purchased. This is depreciated gradually as the item is used over the years. Since fixed assets usually depreciate in value, mainly because they are subject to wear and tear until they eventually do not function as efficiently as they used to, the accounting for such items is in accordance with the process of depreciation. By allowing a certain rate of depreciation to be reflected in the company’s financial statement, a business ensures that its assets are reflected as accurately as possible, as opposed to being overstated.

Certain types of businesses are more capital intensive than others. This simply means that more fixed capital must be acquired before the business can go into operation. This is true for enterprises which require a lot of heavy equipment, such as the automobile industry. Thus, before one enters into a business venture, considering how much fixed capital is necessary is inevitable.