What is Capital – Meaning and Example

What-is-Capital

In accounting, capital means anything brought by the owner into the business in cash or in kind(any item). In other words, capital means that balance amount of assets which is left after a subtracting amount of liabilities from total assets. It can be written as follows:- 

Capital = Total Assets – Liabilities. 

Journal Entry for the Capital. 

The accounting transaction is recorded in the journal day book as shown following: –

For Example: –

Mr A is starting a business with Cash Rs 1,00,000/-, bank balance Rs 10,00,000/-, Land and Building worth Rs 25,00,000/-, Furniture Rs 2,00,000/-, Office Equipment worth Rs 1,50,000/-, and Inventories worth Rs 5,00,000/-.

Date  Particulars   L.F. Debit  Credit  
  Cash a/c Dr.   1,00,000  
  Bank a/c Dr.   10,00,000  
  Land And Building a/c Dr.   25,00,000  
  Furniture a/c Dr.   2,00,000  
  Office Equipment a/c Dr.   1,50,000  
  Inventories a/c Dr.   5,00,000  
  To Capital a/c       44,50,000
  (Being capital introduced by the business)        

Examples of Capital as per the type of Business: –

There are mainly three types of business which is explained as follows: –

  1. Sole-Proprietorship 
  2. Partnership 
  3. Company

1. Sole-Proprietorship: –

Sole-Proprietorship means that type of business which has only one owner. Only he is liable for all the activities of the business. The profit which is earned by the business only belongs to him. and all losses are also born by him. 

In this type of business, anything brought into the business by him is called Capital of the business. 

For Example: –

Mr A is starting a business with Cash Rs 1,00,000/-, bank balance Rs 10,00,000/-, Land and Building worth Rs 25,00,000/-, Furniture Rs 2,00,000/-, Office Equipment worth Rs 1,50,000/-, and Inventories worth Rs 5,00,000/-.

The Total of all these assets become the Capital of the Business. 

Name of Assets Amount
Cash  1,00,000
bank balance  10,00,000
Land and Building 25,00,000
Furniture  2,00,000
Office Equipment 1,50,000
Inventories 5,00,000
Total –  Capital  44,50,000

These all thing are necessary to start a business if the owner did not invest his personal cash on it than he has to borrow a loan from other person or institutions. All loan are known as liabilities. 

Note: –

“Whenever anything brought by the owner into the business in the whole life of the business is known as capital not only when he is investing at the time of starting a business.”

2. Partnership: –

The partnership means that type of business, which has two or more owners. All persons involved in the business are liable to the extent of their share in the business for all the activities of the business. The profit which is earned by the business will be distributed among all partners in their profit sharing ratio. and all losses are also born by all partners in their profit sharing ratio. 

So, in this type of business, anything brought into the business by all partners is called Capital of the business. It will be shown on the name of partners in the business books. 

For Example: –

A, B, and C are starting a new business by investing their cash and thing into the business. These all are shown as follows: –

A brought Land and Building worth Rs 40,00,000/-, and Furniture Rs 10,00,000/-,

B brought Cash Rs 1,50,000/- Plant and Machine worth Rs 24,00,000 and Office Equipment worth Rs 4,50,000/-,

C brought Cash Rs 1,00,000/-, Bank Deposit worth Rs 14,00,000/-,  and Inventories worth Rs 5,00,000/-.

The Total of all these assets become the total Capital of the Business.

Name of Assets Mr A Mr B Mr C Total
Land and Building         40,00,000                          –                            –           40,00,000
Furniture          10,00,000                          –                            –           10,00,000
Cash                           –             1,50,000           1,00,000            2,50,000
Plant and Machine                          –           24,00,000                          –           24,00,000
Office Equipment                          –             4,50,000                          –              4,50,000
Bank Deposit                          –                            –           14,00,000         14,00,000
Inventories                          –                            –             5,00,000            5,00,000
Total Capital       50,00,000      30,00,000      20,00,000  1,00,00,000

Note: – Partnership type of business has more sub-type here we are explained the capital in that type. 

2. Company: –

The Company has two sub-types one is Private Limited and second is Public limited company. In private limited company, the meaning of capital is the same as the partnership firm. just difference is that the partnership firm the owners are known as partners but in the company, the owners are known as shareholders.

But in Public Limited Company, The company issue their share in the share market for subscription by the public.

So, in this type of business, The subscription(or value of share) paid by the public or shareholder is known as capital. 

For Example: –

Mr A & B Ltd get authorized capital of Rs 1 Crore. They issued 50 lac in the share market for the public and it is fully subscribed and paid up. So the Capital shown in the balance sheet of the business will be 50 lac.

The Company will get cash only from the public against the value of the share. Then after receiving cash, the company board of director can use this cash in the expansion of the business. 

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