capital in accounting

In accounting, capital refers to the owner's financial investment in a business. It represents the net worth of a business and is a key component of the accounting equation:

Assets
=
Liabilities
+
Capital
Assets=Liabilities+Capital
🧾 Definition of Capital in Accounting:

Capital is the amount of money or other assets contributed by the owner(s) of the business, plus any retained earnings (profits that have been reinvested in the business rather than withdrawn).

📂 Types of Capital:
Type Description
Owner’s Capital Initial and additional investment by the owner in a sole proprietorship.
Equity Capital Capital from shareholders in a company.
Working Capital Current assets minus current liabilities (used to run day-to-day operations).
Fixed Capital Investment in long-term assets (e.g., buildings, machinery).
Loan Capital (Debt) Capital borrowed from external sources, such as banks or investors.
📘 Capital in Different Business Types:

Sole Proprietorship: Capital = Owner’s investment + Net profits - Drawings

Partnership: Each partner has a capital account; profits and losses are shared.

Corporation: Capital is shown as shareholders' equity, including:

Share capital

Retained earnings

Reserves

📊 Capital in the Balance Sheet:

On the liabilities side (because it’s what the business owes the owners/shareholders):

Balance Sheet (Equity Section Example):

Owner’s Capital: $100,000
+ Net Profit: $ 25,000
- Drawings: ($ 5,000)
-------------------------------
Closing Capital: $120,000

✅ Importance of Capital:

Funds the purchase of assets

Supports growth and expansion

Indicates financial health and stability

Determines the owner’s equity in the business