Definition and Importance
Simply stated, capital is equal to total assets minus total liabilities. The terms used to refer to a company’s capital portion varies according to the form of ownership. In the case of a limited liability company, capital would be referred to as ‘Equity’. Capital essentially represents how much the owners have invested into the business along with any accumulated retained profits or losses.
Capital is typically cash or liquid assets being held or obtained for expenditures. In a broader sense, capital may include all of a company’s assets that have monetary value, such as its equipment, real estate, and inventory.
Furthermore, it is critical for success to constantly analyze and alter the capital-raising plan based on market conditions and feedback.
Accounting Perspective
Assets = Liabilities + Capital. I have used the accounting equation to show the shareholder’s equity/capital as a difference and balancing figure between the company’s liabilities and assets.
Liabilities are economic obligations or payables of the business. Company assets come from 2 major sources – borrowings from lenders or creditors, and contributions by the owners. Liabilities represent claims by other parties aside from the owners against the assets of a company.
In accounting, Capital is neither an Asset nor Liabilities as it is the amount invested by owners in the business to start it or to grow it. As capital is the rights of owners of the business against the assets of the business.
Common Misconceptions
Does capital count as an asset?
In accounting, Capital is not an Asset or Liability. It is the owner’s investment to start or grow the business and represents owner rights to assets.
Is capital a current liability?
Capital is not considered a current liability. It represents the investments made into the business by the owners along with any accumulated profits or losses.