Fixed Capital Definition
Fixed Capital Definition: Fixed capital refers to assets and investments, including PP&E, required for corporate operations, even at a basic level. These assets are selected since they are neither consumed nor destroyed during production but have reusable value. The company’s financial records depreciate fixed-capital investments over 20 years or more.
Understanding
A political economist, David Ricardo, established fixed capital in the 18th century. Ricardo defined fixed capital as any physical asset not employed in product production. This contradicted Ricardo’s concept of circulating capital, including raw materials, operational expenditures, and labor. Fixed capital and constant capital are linked in Marxian economics.
Fixed capital refers to a company’s investment in physical assets like factories, cars, and equipment that remain used for over one accounting period. Businesses may buy or lease fixed assets.
The components of the capital equation also include those that a company uses or circulates during production—raw supplies, labor, operational costs, etc. Marx said that fixed and circulating capital are relative because they pertain to the turnover periods of different physical capital assets.
Fixed capital also “circulates”; however, the turnover period is longer due to the possibility of retaining assets for several years or even decades before selling them for their salvage value. Before the conclusion of their useful lives, fixed assets such as vehicles and aircraft could be resold or put to another use.
The cost of production, the amount of output, and the size of a business’s variable capital all change over time, but fixed capital remains constant. Manufacturing equipment is an example of fixed capital because it is an asset that stays with a company regardless of its production level. The production is dependent on the raw materials used.
Fixed Capital is needed.
The amount of fixed capital required to start a firm varies by sector. Some industries need many fixed-capital assets. Industrial manufacturing, telecoms, and oil exploration companies are examples. Service companies, like accounting firms, require less fixed capital. Office buildings, computers, networking devices, and other office supplies are examples.
Production companies have quicker access to inventories, while fixed capital acquisitions might take longer. A firm may need time to finance substantial investments like new manufacturing facilities. Company finance may take longer to get the proper funding. If equipment fails without redundancy, a corporation may incur financial losses due to insufficient output.
Depreciation of Fixed Capital
Many fixed-capital assets don’t decline evenly, as reflected on income statements. Others last virtually forever, while others degrade soon. After the dealership transfers a new car to the new owner, its value drops significantly. However, company-owned buildings may depreciate less. Investors may assess how much fixed-capital investments are worth to the firm using the depreciation approach.
Liquidity of Fixed Capital
While fixed-capital assets may retain value, they are not very liquid. The reasons are the restricted market for manufacturing equipment, the high price, and the long time it takes to sell a fixed asset.
Conclusion
- Fixed assets are assets that may be reused after manufacturing.
- Equipment, plant, and property comprise fixed capital.
- Fixed capital assets depreciate and are illiquid.
- An alternative to fixed Capital is variable Capital.
