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
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorSeptember 20th, 2023
- The financial accounting term working capital is used to describe the excess of current assets when compared to current liabilities. The relative size of a company's working capital is an indication of the short-term financial strength of the company.Moneyzine EditorSeptember 21st, 2023
