Capital

Posted in Finance, Accounting and Economics Terms, Total Reads: 597
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Definition: Capital

Capital is the money invested by an individual. It is that money which entrepreneurs and businesses use to generate income i.e. by buying assets, equipment, etc. in order to make products or make their service available to the customers. It is the value of all assets (both financial and non-financial) such as cash, factories, machinery, equipment, etc.


It covers three aspects namely,

  • cash or goods used to generate  income
  • net worth of the business i.e. the amount by which the assets exceed the liabilities
  • the wealth of the business given by the total value of the assets


Companies usually raise capital by issuing bonds (debt capital) and shares (equity capital) and use the money for various productive ambitions such as acquisitions and expansions. Capital providers do it in order to get returns on the money they have invested and normally face a certain amount of risk. The risk is different for different means of investments. For example, the exposure to risk is more for shareholders as compared to bondholders as in case of default, the latter have the primary preference.


Example: The total value of assets on the balance sheets of firms gives the total capital of the firm. The debt capital and equity capital are given under separate headings on the balance sheet.


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