Definition of fixed capital index
Fixed capital refers to the assets and capital expenditures, such as land, plant, and equipment (PP&E), that are required to start and run a company, even at the most basic level. These assets are called fixed in the sense that they are not consumed or lost during the processing of a good or service but have a reusable value. Fixed-capital assets are usually depreciated over a long period of time—up to 20 years or more—on the company's financial statements.
Circulation of Fixed Capital
Fixed capital often "circulates," but the turnover cycle is much longer since a fixed asset may be kept for several years or decades before yielding its value and being discarded for its salvage value. A fixed asset may be resold at any time before its useful life expires, which is often the case for cars and airplanes.
Difference between Fixed Capital and Variable Capital
Fixed capital is distinguished from variable capital whose cost and level fluctuate over time, as well as depending on the size of a company's output. Machinery used in manufacturing, for example, would be called fixed capital because it would remain with an organization regardless of current output levels. Raw materials, on the other hand, will vary according to production levels.
Requirement of Fixed Capital
The amount of fixed capital required to start a business varies greatly depending on the situation, particularly from industry to industry. Some business lines necessitate a significant number of fixed-capital assets. Examples include industrial producers, telecommunications companies, and oil exploration companies. Accounting companies, for example, have more limited fixed capital requirements. Office buildings, computers, networking systems, and other standard office equipment are examples of this.
Depreciation of Fixed Capital
Fixed capital investments normally do not depreciate in the manner shown on income statements. Some depreciate rapidly, while others have nearly indefinite useful lives. A new car, for example, loses a considerable amount of value when it is legally moved from the dealership to the new owner. Company-owned buildings, on the other hand, can depreciate at a much lower pace.
Liquidity of Fixed Capital
Although fixed capital always retains its value, these assets are not considered liquid.
Conclusion
The assets which are not consumed during the normal operating cycle of a company constitute the Fixed Capital like plant, machinery, building and so on. These have a high lifecycle value and are not liquid.
