Everything that can be used in the production process, in a broad sense, can be called capital (including equipment, buildings and structures, vehicles, inventories, know-how, patents and licenses). It can be both own and borrowed. Permanent capital is equity and long-term liabilities. That is, everything that can be used for production activities in a sufficiently long period of time.
The concept of capital
In a modern economy, where much attention is paid to distribution and consumption, capital acts as a kind of model in which products and services are created by combining it with labor. In this case, capital is considered as a “black box”, which has certain characteristics:
- possibility of use for production;
- not fully used in production.
Capital is tangible and intangible. It cannot be destroyed, if you break all the machines in the production, then you simply suffer damage. It cannot be saved, for example, by preserving the same machines, you will incur losses by paying for the rental of premises, and the machines themselves will become cheaper over time. Capital should be destroyed gradually, your machines, while working, will gradually wear out, but also produce new values. Money can be withdrawn from one industry and invested, sometimes successfully, in another. But at the same time, it is impossible to directly remove the means of production, for example, from metalworking and move them to woodworking or light industry. This shows the concreteness of capital.
Equity
In modern economic life, the term has acquired a somewhat accounting connotation. Often it is understood as a monetary expression of the contribution of owners to the enterprise and accumulated capital - earned, but not distributed income. Equity and permanent capital are indicators of the capital intensity of an enterprise, its potential production capabilities.
Equity can be not only in cash, but also in the form of equipment, materials, patents and licenses - all that can be used in the production activities of the enterprise. All funds of the enterprise include equity and borrowed capital.
Permanent capital
Permanent capital is all assets that the company has in long-term use. Usually includes its own tangible and intangible capital goods and long-term loans (for a period of more than one year). The indicator gives an idea of the production capabilities of the enterprise. The turnover of the permanent, as well as the turnover of equity, shows the efficiency of production assets. In rare cases, permanent capital is fixed assets plus net current assets.