Meaning Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets. Examples of capital assets are plant, machineryRead more
Meaning
Capital assets mean the assets which are used in the business operations to generate revenue. The benefit from these assets is expected to flow to the enterprise beyond the time span of one year. Capital assets are commonly called fixed assets.
Examples of capital assets are plant, machinery, land, building, vehicles etc.
To expense the capital assets for the economic benefits they provide, they are depreciated over their useful life on some equitable basis.
When capital assets are sold, the gain on sale is credited to the capital reserve account. On loss, it is simply debited to the profit and loss account. Capital assets are shown under the heading ‘Plant, Property and Equipment’ under the asset head of the balance sheet.
Assets that do not qualify as capital assets
The assets which provide economic benefits for less than a year do not qualify as capital assets. Such as inventories, accounts receivables etc. are not capital assets.
Also, those assets which are not intended to be held for more than 1 year are not capital assets even if such assets are capable of providing economic benefits for more than 1 year. Such assets will be considered current assets.
For example, if a plot of land is purchased by a business but the intention is to sell it after 2 months then such land will not be considered a capital asset.
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Introduction Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations. It is the measure of the short-term liquidity of a business. Working capital is the total of the current assets of a business, net of its current liabilities. Working capitalRead more
IntroductionÂ
Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations.
It is the measure of the short-term liquidity of a business.Â
Working capital is the total of the current assets of a business, net of its current liabilities.
Working capital = Current Assets – Current LiabilitiesÂ
The working capital consists of cash, accounts receivable and inventory of raw materials and finished goods fewer accounts payable and other short-term liabilities.
Without a proper level of working capital, a business cannot maintain regular production and pay its creditors and expenses.
Hence, for proper management of working capital, it is divided into types:
I have discussed them below:
Permanent Working CapitalÂ
It is the fixed level or minimum level of working capital that an enterprise needs to maintain to ensure production at the normal capacity and pay for its daily expenses. It is independent of the level of production.
It is also known as fixed working capital.
By ‘permanent’, it does not mean that it will forever remain at the same level or amount but it may change if the overall production capacity changes. But such changes in permanent working capital are not often.
Temporary Working CapitalÂ
It is the level of working capital that depends upon the level of production of a business. It is the excess working capital over the permanent capital that is required to meet seasonal high demand.
It is also known as fluctuating working capital because it tends to change often depending on the level of production.
Temporary working capital is required when high production is required to meet seasonal demands.Â
For example, a bakery will need more working capital to meet the increased demand for cakes and pastry during Christmas seasonÂ
Graph showing permanent and temporary working capital
Here, the temporary working capital is fluctuating whereas the permanent working capital is gradually increasing with time.
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