On this Page

What is Capital?

Capital is the owner’s contribution made towards the start of a business. The contribution can either be monetary or nonmonetary such as cash or physical goods like land, buildings, motor vehicles and stock just to mention but a few. Capital is also referred to as owners’ equity, owners’ claim or owners’ wealth or the net worth of a business. Capital is termed as a special liability. This is because the amount is repaid to the owner(s) if and only if (iff) the business is being terminated. Unlike the other external borrowing which are repayable within a definite time such as one year, two to ten years and so on as the business remain in operation. On the other hand, capital is an internal source of finance for the business. It is money or resources borrowed by the business from the owner(s). You should know that, before the eyes of law and also according to separate entity concept , if the amount of cash or non-cash resources belonging to an entrepreneur are used by him or her to start a business, it is assumed that the business has borrowed form that entrepreneur.

Hence, it is an internal borrowing. Now, as long as the business is in operation, the entrepreneur (owner of the business) will only enjoy profits and suffer losses if that turns to be the case. Further, if the business grows, this will be portrayed through increased capital base (ie growth in owner’s wealth). This is possible if the profit made each year is either fully or partially ploughed back in to the business. However, if the business faces some challenges in the future and it is closing down, it is at this point when the owner (s) rushes to dispose/sell the whole business at a price or on piecemeal. The aim of doing so is to recover the capital he had initially injected in this business. After disposal of the available assets, he can either recover part or the same capital or more of the much he/she invested. That is why capital is referred to as owner’s claim. It is at this point when the owner is being repaid his debt that he had let to the business so it is a special liability.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.