Fixed Capital
Fixed capital includes the assets and capital investments, such as property, plant, and equipment (PP&E), that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time—up to 20 years or more.
Fixed Capital
Definition
Fixed capital includes the assets and capital investments required to start and operate a business, such as property, plant, and equipment (PP&E). These assets are considered fixed because they are not consumed or destroyed in the actual production of goods or services but have reusable value. Fixed capital investments are typically accounted for in a company's financial statements through long-term depreciation, which can last up to 20 years or more.
Origin
The concept of fixed capital dates back to the Industrial Revolution when large-scale mechanized production became widespread. Businesses needed substantial initial investments to purchase machinery and equipment, which would generate returns over the long term. Over time, the definition and accounting methods for fixed capital became standardized, forming an essential part of modern corporate financial management.
Categories and Characteristics
Fixed capital can be divided into the following categories:
- Real Estate: Includes land and buildings, which typically have long lifespans and high value.
- Plant and Equipment: Includes production equipment, machinery, and tools, which play a crucial role in the production process.
- Infrastructure: Includes roads, bridges, and power facilities, which support the operation of the business.
The main characteristics of fixed capital include:
- Long-term: Fixed capital investments usually have long lifespans, typically over 10 years.
- Depreciation: Fixed capital depreciates over time, and this depreciation is reflected in financial statements.
- Immobility: Most fixed capital assets are immovable, such as land and buildings.
Specific Cases
Case 1: Manufacturing Company
A manufacturing company invests in a production machine worth $1 million. The machine has an expected lifespan of 20 years, and its book value is reduced annually through depreciation. The machine generates continuous revenue for the company during its lifespan by producing products.
Case 2: Retail Company
A retail company purchases a commercial plot and constructs a shopping mall. The construction cost of the mall is $50 million, with an expected lifespan of 30 years. Through long-term depreciation, these fixed assets' book value decreases annually in financial statements, but the mall generates rental income for the company in actual operations.
Common Questions
1. What is the difference between fixed capital and working capital?
Fixed capital refers to long-term assets like real estate and equipment, while working capital refers to short-term assets that can be quickly converted to cash, such as cash and inventory.
2. Why is depreciation necessary for fixed capital?
Depreciation reflects the value loss of fixed assets over time, ensuring the accuracy of financial statements.
