Accounting – 6.5 Limitations of accounting statements | e-Consult

Defining 'capital' in accounting is complex because it can refer to different things depending on the context. Generally, capital represents the funds available for a business to operate and grow. However, the specific meaning can vary:

• Capital for a Business: For a business, capital typically refers to the funds invested by the owner(s) and/or raised through borrowing. It represents the resources available for the business to purchase assets, cover expenses, and generate profits. It includes:

  • Share Capital: Money invested by shareholders in exchange for ownership in the company.
  • Loan Capital: Money borrowed from banks or other lenders.
  • Retained Earnings: Accumulated profits that have not been distributed to shareholders.

• Capital for an Individual: For an individual, capital often refers to the wealth they possess, including assets like property, savings, and investments, minus their liabilities (debts). It represents their financial resources.
• Fixed Capital: This refers to capital used for long-term investments in fixed assets like buildings, machinery, and equipment. It's not readily converted to cash.
• Working Capital: This refers to the capital needed to fund day-to-day operations, such as inventory, accounts receivable, and accounts payable. It's a measure of a company's liquidity.

The difficulty in defining 'capital' arises from these varying interpretations. While a business's capital is a combination of different funding sources, the term 'capital' itself can be used more broadly to describe an individual's overall wealth. Therefore, it's important to consider the context when analyzing the meaning of 'capital' in accounting.