Business, Legal & Accounting Glossary
An amount of finance provided to enable a business to acquire assets and sustain it’s operations.
Capital is the existing stock of goods produced by human activities and which are to be used later in the production of other goods or services. The term refers to the real physical means of production and not the sum of money kept aside from savings necessary for purchasing real capital.
Capital is categorized into two sections namely ‘fixed capital’ and ‘circulating capital’. ‘Fixed capital’ refers to durable goods of producers including plant and machinery, buildings, whereas ‘circulating capital’ means the stockpiles of semi-finished goods, materials and components used in production.
However, the difference between ‘fixed capital’ and ‘circulating capital’ is that of degree and not of kind.
In economics, capital or capital goods or real capital (US English) or “share capital” or “issued capital” (UK English) refers to already-produced durable goods available for use as a factor of production. Steam shovels (equipment) and office buildings (structures) are examples.
Capital goods may be acquired with money or financial capital. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business.
Problems of aggregating capital are treated in the capital controversy and economic capital.
In classical economics, capital is one of three (or four, in some formulations) factors of production. The others are land, labour and (in some versions) organization, entrepreneurship, or management.
Goods with the following features are capital:
These distinctions of convenience carried over to neoclassical economics with little change in formal analysis for an extended period. There was the further clarification that capital is a stock. As such, its value can be estimated at a point in time, say December 31. By contrast, investment, as production to be added to the capital stock, is described as taking place over time (“per year”), thus a flow.
Earlier illustrations often described capital as physical items, such as tools, buildings, and vehicles that are used in the production process. Since at least the 1960s economists have increasingly focused on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles. Human development theory describes human capital as being composed of distinct social, imitative and creative elements:
Further classifications of capital that have been used in various theoretical or applied uses include:
In part, as a result, separate literatures have developed to describe both natural capital and social capital. Such terms reflect a wide consensus that nature and society both function in such a similar manner as traditional industrial infrastructural capital, that it is entirely appropriate to refer to them as different types of capital in themselves. In particular, they can be used in the production of other goods, are not used up immediately in the process of production, and can be enhanced (if not created) by human effort.
There is also a literature of intellectual capital and intellectual property law. However, this increasingly distinguishes means of capital investment, and collection of potential rewards for patent, copyright (creative or individual capital), and trademark (social trust or social capital) instruments.
Within classical economics, Adam Smith (Wealth of Nations, Book II, Chapter 1) distinguished fixed capital from circulating capital, including raw materials and intermediate products. For an enterprise, both were kinds of capital.
Karl Marx adds a distinction that is often confused with Ricardo’s. In Marxian theory, variable capital refers to a capitalist’s investment in labour-power, seen as the only source of surplus-value. It is called “variable” since the amount of value it can produce varies from the amount it consumes, i.e., it creates new value. On the other hand, constant capital refers to investment in non-human factors of production, such as plant and machinery, which Marx takes to contribute only its own replacement value to the commodities it is used to produce. It is constant, in that the amount of value committed in the original investment, and the amount retrieved in the form of commodities produced, remains constant.
Investment or capital accumulation in classical economic theory is the production of increased capital. In order to invest, goods must be produced which are not to be immediately consumed, but instead used to produce other goods as a means of production. Investment is closely related to saving, though it is not the same. As Keynes pointed out, saving involves not spending all of one’s income on current goods or services, while investment refers to spending on a specific type of goods, i.e., capital goods.
The Austrian economist Eugen von Böhm-Bawerk maintained that capital intensity was measured by the roundaboutness of production processes. Since capital is defined by him as being goods of higher-order, or goods used to produce consumer goods, and derived their value from them, being future goods.
money, assets, funds, prime, resources
Capital is one of the most fundamental concepts in finance and economics. It is also one of the most elusive. Karl Marx understood its importance when he embraced the words “capitalist” and “capitalism” in his writings. But what is capital?
According to classical economics, capital is one of the three factors of production, the other two being land and labor. It is not consumed either as an end product or through the production process, although it may depreciate over time. Unlike land, capital is itself produced. It is defined not by what it is but by how it is used. To a cab driver, his automobile is capital. To the average person who drives only for her own needs, an automobile is a consumable.
In finance, capital is accumulated wealth held in the form of obligations, such as equities, bonds or loans. As such, it is presumably funding economic activity, making it in some sense a “factor of production”. Currency stuffed in a mattress is not capital. But if that currency is used to purchase a portfolio of bonds, it is.
Most firms hold capital in the form of plants and equipment. Financial institutions are different. With little need for physical assets, they mostly hold capital in the form of financial obligations that serve as a “buffer” against possible losses arising from their financial activities. This assures customers, counterparties and regulators they can remain in business even in the event of large credit or market losses. Generally, the more risk a financial institution takes, the more capital it should hold.
The capital of a business can be measured in two theoretically equivalent ways:
For practical reasons, such computations tend to be done using book value, as opposed to market value, accounting. Because book values tend to be stable, reported capital is an incomplete portrayal of a firm’s economic health. For financial institutions, capital adequacy calculations and asset-liability management can provide better insight and help ensure a firm’s ongoing economic health.
Businesses employ capital to fund the continued production of goods and services in order to generate profit. Businesses invest their capital in a variety of different activities in order to create value. Two common areas of capital allocation are labour and building expansions. When a corporation or individual invests capital, they hope to receive a higher rate of return than the cost of the capital.
Economists evaluate financial capital at the national and global levels to see how it affects economic growth. Economists closely monitor many capital metrics, including personal income and spending, as reported by the Commerce Department’s Personal Income and Outlays reports. Capital investment is also reported on a quarterly basis in the Gross Domestic Product report.
Generally, business and financial capital are evaluated in terms of a company’s capital structure. Banks in the United States are required to maintain a certain level of capital as a risk mitigation requirement (sometimes referred to as economic capital), as directed by central banks and banking rules.
Other private companies are responsible for determining their own capital requirements, capital assets, and corporate investment capital needs. The majority of financial capital analysis for organisations is performed by performing a thorough examination of the balance sheet.
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This glossary post was last updated: 18th January, 2022 | 52 Views.