Definition of Capital
In simple word, capital means that amount or asset which is invested in business by businessman or owner of business. When the business is closed, after paying outside creditors, balance amount will be his capital which he can obtain.
When a person starts any business or profession, he brings some money in cash and some other assets like building, furniture and machinery. These will be his capital. Suppose, you want to start your accounting tuition center in your town, for this you have started it with $ 2000 dollars. You are using also your room for tuition work. So, your $ 2000 and your room will be the capital of your profession and it will be shown in the liability side of your profession’s balance sheet.
Now we discuss its accounting treatment:-
When any body brings capital, then cash comes in the business, so it will be debited and the name of person who has brought money will be credited in journal entry and capital account mention with his name.
Suppose Sham have brought $ 50000 as capital in his small business .
Cash account Dr. $ 50000 because cash comes in the business (See double entry rules)
Sham’s Capital account Cr. $ 50000 (Sham is giver of capital to business.)
In partnership accounting, capital generally refers to financial wealth which is given by each partner that used to start or maintain a business.
In company accounting, where owner is different from management, so meaning of capital will change from sole and partnership business organization. In company, capital is collected from shareholder by issuing those shares. Shares are the smallest part of company’s capital. Its face value may be $ 1 to $ 1000 depending on the nature of business.
Simple formula of calculating capital
Capital = Total Assets – Total outside liabilities (Outside loan + current liabilities)
Equity Share capital of Company = Total asset – total outside liabilities (Debenture + pref. share capital + current liabilities)
Form of Capital
Capital is divided into two major forms.
Fixed capital is excess of fixed assets our fixed liabilities.
Working capital is excess of current assets over current liabilities.