The money that is used to run a business is called capital. It is tracked according to how it is used, and different kinds of investments produce different types of benefits for a company. The way money is spent on a business's needs determines whether it is a fixed capital investment or a working capital investment.
Fixed Capital Investments
A fixed capital investment is an investment in the purchase of items needed to operate a business, but not the materials that go into products. Fixed capital investments, also known as fixed assets, are reused rather than used up in the course of the business. This includes manufacturing equipment, buildings and business vehicles. Such items are typically depreciated over the courses of their useful lives.
Working capital is the money that a business has available to work with. The amount can be determined by adding together all of a business’ assets and subtracting all of its debts. What is left over is the working capital of that business, and it is a good indicator of the net worth of the business. A company that has more liabilities than assets is liable to be forced to close, because it cannot survive long without adequate working capital.
Working Capital Investments
“Working capital investments” generally means purchases of goods and materials to run the business. This typically includes raw materials for manufacturing, goods for resale, packaging and other day-to-day necessities. The term can also be used to refer to investments in the company by the owner, shareholders, or other sources that provide funds for its normal operations. This type of working capital investment usually comes with the expectation of increasing the business profits and of eventually providing a profit to the investor.
Capital Gains and Losses
When capital assets are sold, the seller realizes either a net gain or a net loss. This is determined by subtracting the book value of the item sold from the amount received for it. If the seller got more than the book value, the sale represents a capital gain. An amount less than book value means a capital loss. Long-term capital gains and losses are realized on items that were held more than one year, and short-term capital gains and losses are for items held less than a year. The gain or loss is reported on the company’s income tax return and becomes either a part of its income or a deductible loss.
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