Capital

Definition

The financial term capital is used to describe the funds provided by both the owners (investors) and creditors of a company to buy equipment that can produce goods or provide services.

In the legal arena, capital refers to the portion of owner's equity that is required by statute to be retained by the company to protect creditors.  This is the value of all capital stock issued.

Accountants define capital as owner's equity, and recognize both portions of this account:

  • Paid in Capital:  the amount advanced by stockholders to run the business
  • Earned Capital:  the amount of money retained by the company, and produced by profitable operations

Explanation

Unfortunately, the term capital can be correctly used to describe:

  • Assets:  as they appear in the balance sheet equation, whereby assets are equal to liabilities plus owner's equity
  • Resources:  such as intellectual capital, or human capital
  • Wealth:  cash, property and valuables owned by an individual

With such generalized definitions, it's important to understand the context in which the word is used.

Related Terms

balance sheet, owner's equity, working capital