What is Capital?
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What is Capital?
In simple terms, capital is the owner or owner's investment in the business. It represents the amount of financial resources contributed by the owner or owners either in the form of cash or other assets. For something to be considered capital, it typically involves the following key elements. Number one, it belongs to the owner. Capital represents the owner's interest or investment in the business. Number two, it comes from past contributions or profits. Capital can come from money or assets the owner has invested or from profits the business has earned and kept. Number three, it is used to support business operations. Capital is used to buy assets, pay expenses, and to start or grow the business. And number four, it reflects the residual interest. In other words, after all debts and obligations are settled and paid for, capital is what remains for the owner. So let's go back to our friend Redd and their delivery company. Suppose Redd started the company by investing £10,000 of their own money. The £10,000 is capital because; firstly, it belongs to the owner as it's Redd's personal investment in the business. Secondly, it is from a past contribution as the capital came from Redd's initial deposit. Thirdly, it is used in the business. The money can be used to buy a delivery van, can pay for services such as advertising the business, and also covering startup costs. And fourth, and finally, the residual interest. If the business were to close and sell all the assets, what's left after paying debts would go back to Redd as the owner.
