Question
Distinguish between : $(i)$ Gross working capital and net working capital. $(ii)$ Fixed capital and working capital.
| Points of differences | Gross working capital | Net working capital |
| $1.$ Meaning | It is the sum total of current assets such as bill receivables, debtors, short term marketable securities, bank balance, cash, etc. | It is current assets minus current liabilities. |
| $2.$ Liquidity position | This concept does not give an idea about the liquidity position of the company. | This concept gives an idea how much liquidity the company has. |
| $3.$ Finacial position and measurement | Does not give a true idea of the financial position of the company. | Gives the true idea of financial position of the company. |
| $4.$ Increase in current liabilities | Increase in current liabilities does not increase the gross working capital. $($Reason: Gross working capital is only concerned with current assets and not liabilities.$)$ | Increase in current liabilities decreases net working capital. |
| Points of differences | Working Capital | Fixed Capital |
| $1.$ Meaning | Capital invested in current assets such as stock of raw materials and finished goods, debtors, bills receivable etc. is called working capital. | Capital invested in fixed assets such as land, building, machinery, furniture is called fixed capital. |
| $2.$ Period | Blocked up for a short period in business. | Blocked up for a long period in business. |
| $3.$ Liquidity | Ratio of liquidity is high because working capital can be easily converted into cash. | Ratio of liquidity is less because fixed capital is invested for a long period in fixed assets. |
| $4.$ Risk | Ratio of risk is low. | Ratio of risk is high. |
| $5.$ Requirement | It is required for day-to-day expenses like wages, salary, purchasing raw materials, etc. | It is required to purchase fixed assets such as land, building, plant and machinery. |
| $6.$ Sources | Sources of raising working capital include trade credit, bank overdraft, indigenous bankers, etc. | Sources of raising fixed capital include issue of shares and debentures, financial institutions, etc. |
| $7.$ Depreciation | Depreciation is not calculated on working capital | Depreciation is calculated on fixed assets |
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