What is Capital?
Capital as a factor of production is one of the essential things that facilitate commerce. It has been given different definitions by different professionals including the layman. Here is the view of some of the professionals:
1. Accountants Definition of Capital: Accountants define capital as the money used to commerce a business. However, it is not just the money invested into a business that the Accountant regards as capital but the monetary value of the excess of business assets over its liabilities. This is the net worth of the business. The net worth of any business can be determined from the balance sheet which the accountant prepares at the end of each business year. It is this balance sheet that shows the position of the business as at the time it was prepared.
2. Economist’s Definition of Capital: The economist regards capital as all manmade resources assets that are used for the production of more wealth. Examples of wealth include money, farm implements, seed and seedling, building, machines, land, etc. the reward of capital is interest.
3. Layman’s Definition of Capital: The layman sees capital as the amount of money he has invested in his business. He sees money as what he requires to start his business.
Types of Capital
1. Authorized Capital: It is also known as nominal or registered capital. When a company is being formed, the founder or promoters will state the minimum amount of capital that is needed to start the business. This amount must be stipulated in the company’s memorandum of association. The capital of the company cannot exceed this stipulated amount except if an amendment to that effect is made in its memorandum of association.
2. Issued Capital: This is the amount of share capital that is actually issued for subscription to the members of the public. The company decides on the interim amount of capital it requires immediately for its business and issues shares amounting to this value to members of the public for subscription. The remaining amount becomes the unissued capital.
3. Called up Capital: This is the part of the issued capital that the shareholders have been asked to pay for. It is part of issued capital a company expects the shareholders to apply for subscription especially if they do not need all the proceeds at the same time.
4. Unissued Capital: This is that part of the authorized capital that is not yet raised or issued. It is left unissued till when the need arises.
5. Paid Up Capital: This is the payment made for the called-up shares. If all the shareholders pay for all the shares subscribed for, the paid-up will equal the called-up capital. But if not, the outstanding is called unpaid-up capital which may result from defaults
6. Uncalled Up Capital: This is also known as reserved capital. It is part of the issued capital that is not yet called for payments.
7. Capital employed: It can be regarded as the total assets of an organization (fixed and current assets added together). It can also be regarded as the net worth of an organization. More so, it can be referred to as the total value of resources used in the smooth running of the organization.
8. Liquid/Circulating Capital: This is the amount used in the smooth running of the organization. It is always in liquid state and can be converted within a short period.
9. Fixed Capital: This is the money spent to acquire the tangible or fixed assets of an organization. The tangible materials or items used continuously in a business are called fixed assets. Examples are land, motor van, plant, and machinery.
10. Capital Owned: This is the net worth of the business. It is the difference between the total assets and all liabilities. It is the owners holding in the business.
11. Loan Capital: This is the money borrowed from external sources to finance the business.
12. Working Capital or Circulating Capital: There are funds made ready for the daily transactions of the business, bills, wages that need to be paid for, goods and stocks to be purchased, and other such contingencies that call for daily expenditure. This makes it necessary for every business to have working capital.
It is calculated as current assets – current liabilities.