Circulating capital includesintermediate goods and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services.[1] This is roughly equal tointermediate consumption. Finer distinctions includeraw materials,intermediate goods,inventories, ancillary operating expenses and (working capital). It is contrasted withfixed capital. The term was used in more specialized ways byclassical economists such asAdam Smith,David Ricardo andKarl Marx.
Where the distinction is used, circulating capital is a component of (total) capital, also includingfixed capital used in a single cycle of production. In contrast to fixed capital, it is used up in every cycle (raw materials, basic and intermediate materials, combustible, energy…). In accounting, the circulating capital comes under the heading of current assets.
Building on the work ofQuesnay andTurgot,Adam Smith (1776) made the first explicit distinction between fixed and circulating capital.[1] In his usage, circulating capital includes wages and labour maintenance, money, and inputs from land, mines, and fisheries associated with production.[2]
According toKarl Marx (second volume ofDas Kapital, end of chapter 7) theturnover of capital influences "the processes of production and self-expansion", the two new forms of capital, circulating and fixed, "accrue to capital from the process of circulation and affect the form of its turnover".[3] In the following chapter Marx defines fixed capital and circulating capital.[4] In chapter 9 he claims: "We have here not alone quantitative but also qualitative difference."[5]
Conventionally, (physical)capital assets held by a business for more than one year are regarded in annual accounting statements as "fixed", the rest as "circulating". In modern economies such as the United States, roughly half of the intermediate inputs bought or used by businesses are in fact services, and not goods.