According to the Accountant, capital is defined as the original fund or money with which a person used to start a business.It I the net worth of a business. He sees capital as synonymous to money. Capital in this context is the owner’s equity in a business and the excess of assets ove3r liabilities.
To the Economist however, capital is the resources or wealth made by man that are used for producing further wealth . These are properties of a firm which are meant to be used in the production of other goods, it includes such assets as machines,raw materials,buildings, etc.
To the lay man, capital is the total amount of money for running a business.
Types of Capital
Authorized, Registered or Nominal Capital : This is the total amount state in the Memorandum of Association and approved by the registral of companies which a company can issue out for subscription. It is the total amount of capital which a company is authorised to issue out to the public.
Issued capital: This is part of nominal capital the company decides to issue out to the public for subscription. It is the total of shares offered to the public out of the nominal capital at a particular time
Paid up capital : This is part of the called up capital which the shareholders have actually paid for it. It is the total amount paid up or credited as paid up on the issued share capital.
Called up capital: This is part of the issued capital that has actually been called up,and the shareholders have been asked to make payment. It is part of the issued capital which is expected of the shareholders to pay for.
Uncalled capital: This is the total amount of capital that have not been called up on the issue share capital. It can be referred to as part of the issued capital that is yet to be called up for payment.
Capital employed : This is the total assets both fixed and current ,less current liabilities. It is the actual amount of money and other assets used in the business. It is Total asset – Current liabilities.
Capital owned: It is the owner’s financial interest in a business. It is the net worth of a business.
Fixed capital : This is the durable capital of an enterprise which is used continuously for further production. They are not intended for immediate consumption,but rather as a means of production. Examples are furniture,fittings,building, machinery,etc.
Loan capital: This is the total amount of money a business borrowed from external sources. It applies to debentures and other fixed loans.
Liquid capital: This is made up of asset that can be easily converted to money i.e. that can be easily turn into cash at short notice. This consists of near money,debts and bank balance.
Working/Circulating capital: This is the amount that is used for the day to day running of the business. It is the capital available to a business for general purposes after current liabilities have been met. It includes capital used for paying wages, salaries and payment for raw materials. It is calculated as Current Assets – Current liabilities.
Importance of Working Capital
It is used as check against tying down too much money for current assets
It helps to determine whether the business is solvent or not i.e. whether it has the ability to settle its debt without selling fixed assets.
It helps to determine the fund that wil be available for the running of the business on a daily basis
It gives an indication that the business is being financed internally and not by suppliers
It is a sign of healthiness i.e. it will help the investor to know whether to invest or not
It can be used by a business as a basis for planning to avoid losses
It provides basis for profit making by the business since it is used to buy stock from where profit is derived