Capital Problems and its Solution

Problem

Dear Professor Vinod Kumar,

I am a trainee accountant have been browsing through your website http://www.svtuition.org/ and have found it to be very helpful. I have especially found http://www.svtuition.org/2009/10/what-is-capital-in-accounting.html  to be a helpful explanation of capital. However, I have a few more new questions I would like to ask you about capital. I hope you can help.

You stated

 “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.”


1) Does this mean that ALL assets that a person brings to start a business will be his capital? If not, which assets cannot be counted as capital?

2) Does this include INVENTORY as well, if he brings that in when he starts any business i.e. if he purchased $1000 worth of inventory (out of his own bank account, not the business’s bank account)?

3) Does this also mean that if he adds more assets to the business such as building, furniture, machinery and INVENTORY (again, assets he purchased with his own bank account, not the bank account of the business), it will increase the capital with however much the building, furniture, machinery and INVENTORY are worth?

4) Can owner takes out (i.e. take for himself) any assets (including BUILDING, furniture, machinery and INVENTORY) out of the business for himself? If so, will these be counted as drawings in owner’s equity? If not, which assets is he not allowed to take out?

5) You also stated

“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.”

What do you mean by capital being shown in the liability side of the balance sheet? Can you please explain this? Does this mean that capital and owner’s equity are liabilities? I though capital/owner’s equity is separate from assets and liability because assets – liabilities = owner’s equity?

I know I asked a lot, but these questions are bothering me and confusing me, so I hope you can help me understand capital/owner’s equity more and answer all these questions for me.

Thank you very much for your helpful website, especially your article http://www.svtuition.org/2009/10/what-is-capital-in-accounting.html

Sincerely,
Anonymous

Solution

1) Yes

2) If he bought inventory from his personal bank account instead of his business bank account, either it will be capital or if mentioned, it may be loan to business.

3) Personal fund provide to business must be capital or loan form or advance.

4) Dear businessman can take any asset from business and it will be drawing or decrease in capital.

5) Capital is that part of company fund who is payable to the owner or owners of company.

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Accounting Education: Capital Problems and its Solution
Capital Problems and its Solution
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