What is capital?
Capital refers to anything that provides financial or economic assets for investments. In simple terms, it is money that can be put into something to generate income or profit. For businesses, this usually means using funds to purchase equipment, hire staff, or support other operational costs. Essentially, capital is anything that is use to generate revenue.
What are the types of Capital?
Capital is a key resource for any business, and it comes in different types:
Equity capital is the money or value of a company’s shares of common and preferred stock that are issued to shareholders. Equity capital is generated through the sale of shares in an initial public offering (IPO) or by issuing new shares through a secondary offering.
Debt capital is the money borrowed by a company from lenders such as banks, venture capitalists, or other financial institutions. Debt financing can include loans, bonds, notes payable, and line of credit agreements.
Investment capital is money invested into a business venture by individuals or entities hoping to receive a return on their investment over time. Investment capital can come in the form of cash or assets such as real estate property or intellectual property rights.
Working capital is what allows a company to pay its short-term obligations and meet its day-to-day operational expenses such as payroll costs and accounts payable payments. Working capital is calculated by subtracting current liabilities from current assets.
Why capital is treated as a liability?
Capital represents the funds that a business has available to reinvest in its growth and hence most people tend to think of capital as an asset. However, capital can also be viewed as a liability.
For example, if you're a business owner, you might use capital to purchase equipment or inventory. In this case, capital is an asset because it represents a future expense. On the other hand, if you're a shareholder in a company, the capital you've invested may be at risk if the company doesn't perform well. In this case, capital is a liability because it represents a potential loss of value.