CAPITAL IN ACCOUNTING

Capital is the funds given by the owner to raise the level of the business by supporting business projects or operations. It is the claim of the owner in the total assets of the business. Capital is not always the money or cash this may be the building, land or car, etc. It increases the level of the business. In simple words, you can say that it is the stock or ownership in a company. Capital may be the cash or other financial assets which have held by an individual.

capital in accounting business economics definition

Examples of capital:

  • Buildings
  • Machines
  • Equipment
  • Furniture
  • Stock

Types of Capital:

  1. Financial (Economic) capital
  2. Human capital
  3. Social/ Relationship capital
  4. Natural capital
  5. Constructed capital

Financial/Economic Capital

Financial capitals are those capitals which are used to raise the level of the business to a large extent. It comes from the two sources such as debt & equity.

Debt : In debt capital company has to repay the funds at a later date, with interest. Debt is usually acquired or issued by private sources, such as insurance companies, financial institutions, friends, etc.

Example of Debt:

  • Bank loan
  • Credit card debt
  • Personal loans, etc.

Equity: This type of capital is generated by the sale of stock as well as the contribution of the business owner. Equity capital does not need to be repaid.

Human Capital

Human capitals include skills, knowledge, experience, attitude, motivation, health, abilities of the individuals or company’s employees bring to the operation.

Companies can enhance the employee’s performance by conducting continuous educational classes, professional development seminars, healthy-living programs, etc.

Social Capital

It is also called relationship capitals. It includes team, groups, network of individuals to work together in a chain or cycle. In this people work in a chain and do things to help, encourage, motivation peoples those which are present in their social network.

Example of Social Capital: A rich or wealthy person is present in your’s network & he has helped you by giving you money for your company’s to run business operations more effectively.

Natural Capital

Natural capital includes the calculation of total stocks, the flow of natural resources, services in a region. It includes all the natural resources on which all living beings depend upon as well as ecosystem services.

Constructed Capital: It includes the material objects, system, ecosystem which is created or cultivated by humans.

Trading Capital

It is the amount of money allocated by the investors for buying and selling various assets and securities and it is the part of their overall investing strategies. It is also referred to as “bankroll”.

Working capital

Working capital is the capital which is used by the company or business for their day-to-day operations. This type of capital plays a very important role in the growth of a business as they can be easily convertible into cash. Working capital is also known as net-working capital (NWC), as it is the difference between a company’s current assets and current liabilities.

Working Capital includes the following:

  • affects the cash flow in the business.
  • high working capital means low risk of default.
  • low working capital means a high risk of default, hence referred to as a working capital deficiency.
  • shows that whether a company generates sufficient cash to cover its debt, short-term liabilities.
  • Working capital cycle: The working capital cycle is also known as the cash conversion cycle. It refers to the time period that is taken by any organization to convert its net current assets and current liabilities into cash.
  • Working capital management: It is the management which makes a decision related to working capital and short-term financing of any organization. It ensures that the organization is able to run its operations continuously and has sufficient cash flow to fulfill their short-term debt, future operational expenses. It is the relationship between the short-term assets and short-term liabilities of an organization.

The formula of working capital:

As accounting equation states that;

Assets = liabilities + Capital

So, the working capital equals;

Working Capital formula= Current Assets Current Liabilities

Here, in this formula, current assets refer to the assets available within 12 months while current liabilities refer to the liabilities due within 12 months.

Capital synonyms

Money, cash, funds, property, financing, assets, leading, boss, stock, investments, chief, prime, vital, prominent, main, principal, available resources, first-rate, basic, dominant, major, key, working capital, uppercase, roof, etc.

Different terms used for capital in accounting:

Capital contribution accounting: It is the value which is given by the shareholder to a business or cooperation. This value may be in the form of cash, equity, debt or any other asset

Capital lease accounting: It is a contract which allows the lesse for the temporary use of an asset. It is the type of lease in which ownership is temporarily transferred to the lesse by the lessor and it is still recorded by the organization in the balance sheet, income statement, and cash flow. In simple words, you can say that lessor is an entity which finances an asset lessee own.

Capital reserve: It is the reserved part of the company’s profit to meet future capital expenditure.

Growth capital: Growth capital is an increase in the value of an asset in a period of time. It is the difference between the current value of an asset and its purchase price at the time it was purchased. It includes:

  • revenues of the company are growing rapidly.
  • the positive cash flow of the business.
  • used to fulfill the needs of a company.

Capital account: It is a measure of inflow and outflow of private, public international investments. It is the portion of the balance of payments which keeps records of all transactions made between two entities of two different nations. It has an influence on net change in the ownership of national assets. It includes:

  • In accounting, capital account refers to the owner’s equity section of the balance sheet.
  • For the cooperation, it refers to the shareholder’s equity section of the balance sheet.

Capital gains: It is the value of capital asset rises from the sale of property or an investment. Capital gains can be short-term (one year or less) or long-term (more than one year).

Capital funds: It is the money used by a business or an organization for its daily and long-term needs. It is issued by the lenders and the equity holders.

Capital reduction: It is the reduction of the capital amount of the company. In simple words, you can say that it is the process includes the decreasing of the company’s share capital.

Capital venture: It is the value of money used to start a company, startup or a small business which ensures their long-term growth potential. It is issued by investors.

Recording Capital Expenditure

It is the amount of money which has been spent by a company to gain fixed assets. Fixed assets are those assets which are not easily convertible into cash such as building, equipment, land, etc.

Capital expenditure includes tracking your investments accurately and it shows you about your company’s worth.

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