What is the meaning of capital in business?
What is the capital, and what are the types of capital? The simple meaning of capital can be applied to money. All those things can be taken in the capital which gives profit to the owner. The word capital can be used to mean money, but it is not possible to consider only money as the capital of a person. All assets, patents, of any person or organization, will be considered as capital. In accounting also, the word capital is used to mean the amount which a person or organization invests in its business as an investment so that the person can get good profit.
Capital is very important to run any business. When a business is started by a person, the money invested by him in that business is considered capital. If the businessman does not have his own money and if the business is being started by him by taking a loan from any bank or person. In this situation also the amount invested by the person is called capital. A loan taken from others is a loan for the businessman, but when a person invests money in a business, it will be considered as capital.
Understanding capital in accounting
In the general sense, the word capital is considered by many people to be money. Which is true to an extent. Capital in accounting is the amount that a person has with himself for investing. When a person invests capital in a business, then that person wants to provide profit in return for capital investment. A person uses his capital to earn more capital.
By applying capital, a person buys assets and all the necessary things and assets so that he can get the benefit of capital in the coming time. The aim of any person is to get more capital than what he has invested. If some money is withdrawn by the person from the capital invested by the person, then it will be called drawing. Because it has been taken out for the personal use of the person.
Types of Capital in Accounting
Although capital is used to mean money, to understand it, capital example is shown below.
1. Debt Capital
2. Equity Capital
3. Working Capital
4. Trading Capital
This type of capital includes the capital taken by a loan. When any business is started by any person or organization. Due to lack of money, if he takes a loan from any person or government bank, then this type of capital is called debt capital. If you are assuming that a person will start a business by taking a loan from someone, then he will get a profit or not. But this debt can prove to be a good opportunity for a person. For this, you can understand with an example.
If a loan of 100,000/- was taken by a person from a bank or from a person in 1%. If the person is getting more profit in business then debt capital is not bad for that person. Debt capital can be a great business opportunity for the new businessman.
You can use this capital by means of shares. If a person or a company has shares, then they can be easily converted into money by selling them by the company, if the shares of a company are being bought by the company, then it is the capital of the company. Shares can be sold by the company when the time comes.
It is understood to mean that capital is used for meeting the daily expenses or needs of any person or company. Current liabilities are reduced by this capital. Working capital is called the amount of work every day. The current year’s liability is eliminated from this capital. In simple words, the meaning of working capital is taken from that capital that is given for daily expenditure.
Capital itself is used to increase capital. A person does many things to increase his business. Trading capital includes all the capital which is attempted by the person to increase his wealth. When money is invested by a business in its business, it is called investment of capital, but with trading capital, money has to be earned from the daily investment.
What is the difference between capital and money?
Money is meant to be applied only to cash but capital is meant to be applied to the capital which is kept by any person for investment. Capital is used for cost. By investing capital, a person wishes to get more profit or income in the coming time. There is not much difference between money and capital. If money is invested, then it is called capital for the investor.