What is Difference between cash and capital


Abhisek Sarkhel from India has asked the question in Accounting Education

"What is difference between cash and capital in accounting?" 

This is basic accounting question and I am trying to explain differences between two important accounting terms


1st Definition

a) Cash means cash in hand or cash at bank at the end of year.

b) Capital means excess of total assets over total liabilities.

2nd Liquidity

a) Liquidity is the main feature of cash. If cash is in your pocket or in bank. It will be cash. If cash has been invested in building, it will not be cash.

b) Capital may be in cash or in kind. A business man start his business in his own house, then his own house will be his capital in kind.

3rd Co-relation 

a) Cash may be more or less than capital.

b) Capital is one of source of our cash.

4th Effect of Form of Business 

a) There is no effect of form of business on cash.

b) In sole trade, one man will be the owner of capital. In partnership, its partners will be the owner of its capital. In company, its shareholders will be the owner of its capital.

5. Changes

a) Cash will only change, if there will be any expenses paid or any income will be received in cash.

b) Capital will only change by changing in the value of assets, liabilities, revenue or expenses.

6. Gain

a) Cash flow from business is revenue earning. Suppose, you make a house and give it on rent, this is your cash inflow from operation.

b) Capital gain will be, if you sell same house on profit to other party.

Related : Difference between Finance and Financing 

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Accounting Education: What is Difference between cash and capital
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