What is Capital with respect to Accountancy?

We understand very well what a capital city and capital letter are but capital as in accountancy, what is that? Many people find the terminology of accounting pretty troublesome. Here is a detail description of capital which would help you in the later.

When someone plans to set up a business that holds expertise in whichever field a sum of money is required to get it started. It exists in many forms. Capital is the resource of financing the business in any way. From funding the machinery and tools to taking care of revenues and sale outcomes capital is used by the business. To operate a business, from baby steps to significant decisions, capital proves to be an important asset for the business. All the belongings of the business from an asset as small as a tool, equipment, machinery to as huge and important as cash, vehicles, software, accounts, stock etc. are all counted as capital. Anything, except the raw materials, that aids business is generating revenue and gain financial stability is called capital. In a layman’s terminology, you would call it an investment. In easy terms, yes we can call it an investment. You put money in the infrastructure and framework of your business so technically it works as an investment.

Is money the same as capital? Many businessmen and people related to accounting confuse these two terms; money and capital. It is important to mark the difference between them. They are not the same terms at all. Money holds the capability to purchase anything. All the buying and selling is carried out by using money. However, capital is not concerned with purchases. It is considered as an asset which adds value to your wealth and business. Capital aids in building revenue and earning a profit. In a nutshell, with money, you can buy the property and with capital, you can add value to the services you offer.

Gain and Loss with respect to Capital: After you invest money in business the profit or loss decides the value of capital. If there is a profit, the worth of capital increases. If there is a loss, the worth of capital decreases. For best results and to gain accurate figures always seek out trusted Accountants in your area. Here is a resource for Accountant Carrum Downs we have tried and tested previously.

Example of Capital Gain: You buy machinery for $2000. You do some modifications in it yourself and now sell it for $2500. After you subtract the initial cost from the final cost you get $500. This is a capital gain.

Example of Capital Loss:  You buy machinery for $2000. You realize some parts are not very good. You buy new ones at a cost of $500. Now you sell it at $2200 whereas it should be more than $2500. You get a loss of $300.

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