Fixed capital is the material base of the organization

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

In order for an organization to function fully and produce the appropriate product or type of service, it must have at its disposal the appropriate material base and its sources.

The material base of the organization, its fixed capital is those buildings, mechanisms, equipment, various structures, machines that the organization owns and which are involved in production processes, as well as fixed assets valued in monetary terms. Naturally, no production can exist without the necessary materials and auxiliary means.

The concept of the main fund of the organization and its components

Because the fixed capital of an enterprise or organization is associated with their fund structure, then it is necessary to consider in more detail the issue of fixed assets.

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  Firstly, these are production assets: transport, equipment and machinery, electrical networks,cars and roads, etc., i.e. everything that is directly or indirectly involved in the production and sale of intermediate and final products. Naturally, all this wears out over time and as it is used, money is needed to maintain them in the desired shape or replace them with new ones. The cost of renewal is included in the cost of finished products, and replenishment occurs through capital investments.
• Secondly, these are the so-called fixed non-production assets: residential buildings, buildings for social and cultural organizations (kindergartens, schools, houses of culture, creativity, he althcare), etc. They are not directly involved in production processes, but serve them. Their restoration and reproduction come from the national revenues of the state, and to a lesser extent at the expense of private individuals.
• Third, these are revolving funds and circulation funds.

Each stock type has its own rather complex structure and many components. One has only to say that the production fixed assets are divided into active and passive. The former are involved in the most important production processes, they are used to judge the efficiency and viability of the enterprise. The latter are designed to ensure the full functioning of the assets.

Valuation of fixed capital

So, the fixed capital is an expression of the main production assets of the enterprise in monetary terms. It is necessary to calculate in specific amounts the degree of wear and tear of the elements of fixed assets and the allocationappropriate funds to restore the production material base. Because fixed assets are intended for long-term operation, and the conditions for reproduction and restoration change quite quickly, the assessment of fixed capital is carried out by several methods: balance sheet assessment or initial, recovery, liquid, residual, average annual. Let's take a quick look at what some of them are.

At the balance sheet value, fixed capital is the money that went to the initial purchase of fixed assets. This includes the cost of transport for deliveries, installation work, commissioning, etc. Prices are taken from the calculation of those that were in force at the time of the arrangement of the object.

When restoring valuation, fixed capital is the value of fixed assets already today and taking into account the distortion of the price factor due to inflation and other socio-economic processes. To calculate the replacement cost, apply:

a) book value indexation method;

b) the method of directly recalculating the book value in relation to those prices that prevailed at the beginning of January of the next calendar year.

Residual value is the difference in prices that arises between the primary cost and depreciation of fixed assets, expressed in money. The rest of the methods also have their specific meaning.

Forms of fixed capital

The fixed capital of an organization at different stages of its existence can have different forms of expression:

• investment, i.e. the attachmentinto real existing assets: purchase of equipment, construction of buildings, etc.;
• direct production and depreciation of equipment, its physical and moral deterioration;
• revenue or reimbursement - at their expense there is a new purchase of capital goods.

In addition, the main capital components are: fixed assets, long-term investments to increase long-term assets, investments in securities, as well as assets that are not tangible - these are intellectual property products, the organization's reputation, organizational financial expenses etc.

Calculation and evaluation of the organization's fixed capital is carried out according to special formulas.