Business, Legal & Accounting Glossary
Circulating capital is referred to that capital, which flows within any organization. Circulating capital can be measured as that stock of value which is used within any production organization. Major components of circulating capital include stocks of raw materials, inventories of finished goods, cash on hand for paying wages and work in progress.
The initial use of term circulating capital was in works of several eminent economists like Adam Smith, David Ricardo and Karl Marx. Circulating capital can be referred to as the sum of physical capital and operating expenses of any production unit. Operating expenses can be explained as short-lived resources that are used in production as well as used up in the process of generating other goods or services. Circulating capital is equivalent to Intermediate consumption.
Circulating capital can be treated as an essential component of the technical capital, which is exhausted in a sole cycle of production. While accounting capital usage for any type of production, circulating capital can be headed under circulating actives. Circulating capital as a concept is well used in the second volume of Das Kapital authored by Karl Marx. The volume includes a clear distinction between fixed and circulating capital. Fixed and circulating capital differs in the duration of their turnover-time. Circulating capital is held in any business for over a period of one year, then it in annual accounting statements, it is regarded as fixed capital.
In any business, there remains a tendency of falling deficit of circulating capital and this prevents the business owners from employing their capacities in a proper way. This, in turn, refrains from performing a normal course of business. There are several external factors that are responsible for the deficit of circulating capital. Deterioration of financial situations of the business owner is the prime cause responsible for the deficit of circulating capital.
Any business process requires acquiring fixed assets, the capital required for this is termed as fixed capital. Fixed capital can be referred to as a steady capital that can be used over a long period of time. Fixed capital is mainly used in investing in to fixed assets for any business.
Fixed capital can be obtained from both owned and borrowed capital. For accumulating owned capital issuing of debentures is required and for borrowed capital, one can use loans from financial institutions. Equity shares can also be treated as an excellent source for fixed capital.
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This glossary post was last updated: 20th January, 2022 | 0 Views.