Capital concept
Capital is defined as the total wealth of an individual, and it is also defined as a general term that includes anything that gives value or benefit to its owner, such as a factory and its machines, or intellectual property such as a patent, or the financial assets of a company or individual, and money itself can be considered capital so that the capital It is often associated with cash that is used for investment or production purposes, and it is also defined as an investment for the owners of the business. In addition to that, it is the result of any accumulated profits or losses and can be considered the remaining wealth after the settlement of all obligations.
What are the types of capital?
In general, capital is one of the important components of running a business and financing its future growth, and capital is usually produced either from business activities or from financing debt or equity. When preparing the budget, companies of all kinds focus on three types of capital: working capital, equity capital, and debt capital. As for business, commercial capital is identified as a fourth component, and the following is an explanation of these types:
- Working capital, also known as “net working capital,” It is defined as a measure of a company’s liquidity and is used to meet its daily obligations; it also indicates the difference between current operating assets and current operating liabilities.
- Equity capital: This is the capital taken from the prices of the company’s offered shares and used to finance the expansion of the business.
- Debt capital is defined as the sum of borrowed funds that appear on the balance sheet as a capital asset, while the amount receivable appears as a liability.
- Commercial capital: It is the amount of funds allocated to the company that allow for the purchase and sale of securities of all kinds.
Why is capital considered a credit?
The following is a statement of a group of reasons that made the capital a creditor of all kinds:
1- Use of capital
where the company owes capital so that it is used to pay the continuous production costs of goods and services in order to achieve profits, and the capital is also used by companies to finance investments of all kinds, as it is used for the expansion of employment and buildings.
2- Forms of company financing
The capital is the primary and main component of the company, and thus the company owes it and must pay it. For example, with regard to the share capital, meaning that the company finances its own capital from shareholders, that is, the company sells its own shares in exchange for cash, the current assets of the institution will increase. In the debit part, the capital will increase, and in the credit part, the company is considered to owe the shareholders for the value of those shares, and this represents an obligation on the company to be paid. As for the commercial capital, the capital is credited to the company with the money used to purchase shares and securities.
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