Last edited 15 Mar 2019

Capital

Contents

[edit] Introduction

In classic economics, a country’s resources are called the ‘factors of production’ and are generally necessary to create goods and services (they do not form part of the final product).

The factors of production (FOP) are:

  • Land
  • Labour and
  • Capital

So, in this respect, strictly speaking, ‘capital’ amounts to those man-made items that further the production process, such as tools, machinery, plant and equipment. (Some economists cite a fourth FOP: the entrepreneur, who takes the risks to organise the three factors and direct them to create new goods and services.)

However, a more contemporary definition might be the wealth (money or assets) that reveals the financial viability of an individual, organisation, or nation, and which is assumed to be available for development or investment. This may be further broken down into:

[edit] Capital investment

This is the amount of money (funds) that has been invested in a business to help achieve its objectives. The investment may come from the owner, shareholders, bondholders, equity investors, banks, venture capital, angel investors and lenders.

Capital investment may also refer to a firm’s acquisition of capital assets or fixed assets, such as plant and machinery.

The amount of invested capital is not usually listed as a separate line item on a firm’s balance sheet; it has to be inferred from other information in the firm’s accounting records.

[edit] Capital employed (or funds employed)

This is the total amount of capital being used in a firm to allow it to continue as a revenue-generating business. It is the total value of all the assets employed in the business and can be calculated by taking total assets and subtracting current liabilities (or fixed assets plus current assets minus current liabilities).

[edit] Working capital

This is the excess of the total current assets over the total liabilities of the firm (or current assets minus current liabilities). The formula measures a firm’s short-term liquid assets that remain after short-term liabilities have been paid off. An example would be as follows:

[edit] Current assets:

Cash £30,000

Inventories £10,000

Accounts receivable £30,000


Total £70,000

[edit] Current liabilities

Accounts payable £15,000

Short-term borrowings £10,000

Liabilities accrued £5,000


Total £30,000


So, the working capital is £70,000 - £30,000 = £40,000

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