Capital
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 14
January 2012.
The Meanings of Capital
Capital in Business
In business, Capital is the investment in a company for the purpose of conducting business, composed of a mix of debts, preferred and common stock, and retained earnings.
Working Capital in Business Analysis
In business analysis, the term working capital refers to the difference between two balance sheet figures, current assets and current liabilities (i.e., Working capital = current assets less current liabilities). The financial metric working capital is thus a measure of how well prepared a company is to meet its near term financial obligations. The working capital metric has the same input figures, and addresses the same issues, as another financial metric, the current ratio.
In the leasing of assets, a capital lease differs from an operating lease with respect to balance sheet ownership of the asset. With an operating lease, the original owner (the lessor) retains ownership, while the asset is used by the lessee. Under a capital lease, ownership is transferred to the asset user, the lessee.
Capital in Accounting and Budgeting
In accounting, the designation capital is used to distinguish capital budgeting from the budgeting of operating expenses. Capital budgets are used to plan and manage spending for capitalized assets—assets whose book value appears on the company's balance sheet. These assets are sometimes called capital assets, that is, assets that are tangible and long lived (Note that the term capital asset is sometimes used interchangeably with fixed asset).
Capital in Economics
In economics, capital refers to any economic resource or wealth, and the term may apply to the financial strength of individuals, companies, or countries. In a capitalist economy, the means of production and distribution are privately owned by individuals or corporations, and economic development is based on the accumulation and reinvestment of free market profits.
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