Meaning of Capital
Capital can have some relatively different but related meanings in economics, finance and accounting. In finance and accounting, capital generally refers to the net worth of a business, especially, that used to start or maintain a business. In economics, capital is one of the factors of production.
To a Layman, capital is defined as the total amount of money available for running a business.
Types of Capital
- Authorised, Registered or nominal capital: This is the total amount of money which a company or an organisation is allowed to issue out to public. It is the amount stated in the memorandum of association and approved by the registrars of companies which a company can issue out for subscription.
- Issued capital: This is part of the nominal capital that the company is willing to issue out to the public for subscription at a particular point in time.
- Called up capital: This is part of the issued capital that the people have been asked to make payment for.
- Paid up capital: This is part of the called up capital which the shareholders have paid for.
- Uncalled capital: This is part of the issued capital which is yet to be called up for payment.
- Loan capital: This is the total amount of money borrowed from external sources to run a business.
- Capital owned: This is the excess of value of asset of a business over its liability. It is the net worth of a business.
- Capital employed: This is the total asset of a business both fixed and current asset. It is the total value of the resources used in running a business.
- Liquid capital: This is the asset that can easily be converted to cash
- Fixed capital: This is the durable capital of a business; it is used continuously for further production. They are not for immediate consumption but for production of other goods.
- Working or circulating capital: This is the ready and available funds for business daily transaction i.e. cash at hand. It is the money available for payment of wages and salaries, buying of raw materials, money available for transportation and every day to day expense. Working capital can be calculated as Current Assets – Current Liabilities.
Importance of Working Capital
- It helps to determine the funds that will be available for running a business.
- It helps to know if the business is solvent or not i.e. to know if the business has the ability to settle debt without selling fixed asset
- It serves as a check against holding down too much money for current asset.
- It is a sign to show the healthiness of a business, It helps an investor to know if to invest in a business or not.
- It helps to determine the funds that will be available for the running of the business on a daily basis.
- The life span of any business depends on its working capital
- It helps bankers in determining either to grant loan or overdraft to a requesting organisation.
Profit can be defined as the financial gain or benefit which a firm realises from its business or transaction dealings. Profit also relates to the gain resulting from investing one’s capital in a business. The purpose or motive of any business is to make profit.
Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business.
To the economist profit is the reward an entrepreneur gets for risk taking in starting a business or a company while the accountant sees profit as the excess of income over expenditure.
Types of Profit
- Gross profit: Gross profit is the differences between the total sales for goods and cost of goods sold.
- Net profit: It is the excess of gross profit over the selling, distribution, taxes and administrative expenses.
This is the value of total sales of an organisation during an accounting period .Turnover is another name for sale.
Rate of turnover: This is the number of times the value of average stock of a business is sold during the year. The rate of turnover varies from one product to another. Expensive goods usually have slow turnover rate while perishable goods have rapid rate.
Factors that can affect turnover
- The goodwill and reputation of the seller
- The types of goods
- Advertisement and sales promotion
- Nearness of the business to consumer
- Reduction in prices
- Increase in the quantity of goods sold
- Constant availability of goods.