What is the meaning of capital? It is the amount invested
by the proprietor in case of proprietorship business and by
partners in case of partnership business into the business.
If the business earns profit or proprietor partners invest
additional amount, the amount of capital increases in the
business.
On the other hand, if the business incurs losses or amount
is withdrawn, the amount of capital decreases.
Capital is also known as owner's equity or net worth which
is computed as excess of assets over liabilities as follows.
3 types of business can be there.
1. Individual business which is also known as sole
proprietor business.
2. Partnership business in which more than 2 people do
business together.
3. Corporate firm or company. There are many more like HUF,
association of person etc.
but I am not concerned with them. Let's talk about them.
Individual, sole proprietor, partnership and corporate.
Individual business has only one owner which is known as
sole proprietor.
Partnership business has more than 2 owners who are known
as partners.
Corporate firm or company is known as shareholders.
We call them shareholders.
So friends, if sole proprietor business is there, then
capital means money invested by the sole proprietor.
If partnership business is there, then capital means money
invested by more than 2 partners.
And if corporate is there, then capital means money
invested by shareholders.
Sir, there is one more line written there.
It is calculated as excess of assets over liabilities.
What does it mean?
It means a balance sheet which we will discuss in detail in
financial statement topic.
Here all assets are written.
And here money of the owner is written.
And debt, liabilities.
This side is assets and this side is total of capital plus
liabilities.
One side is assets and other side is capital plus
liabilities.
Do you know what is the equation?
Equation is capital plus liabilities is equal to assets.
I will try to justify this equation.
I will try to justify this equation in normal words.
Capital plus liabilities is equal to assets.
See friends, what is the job of a business?
Money comes.
There is some cut in the writing.
In business, money comes from where?
First, money comes from capital.
Owner invested money and then borrowed money.
Money can come in two ways.
Capital plus liabilities.
And with that money, building, furniture, goods, debtor,
cash and bank balance are created.
All assets are created with that money.
So, assets are created with capital plus liabilities.
You will have the same amount of assets as you invest.
If you want to buy something, where will the money come
from?
Either you will invest from your pocket or you will borrow
money.
So, the amount of money you borrow from your pocket, you
will get the same amount of goods.
Right? Right Sir.
So, capital plus liabilities is equal to assets.
Now friends, if I take liabilities to the other side, what
will be the equation?
Capital is equal to assets minus liabilities.
How did capital come out?
Assets minus liabilities.
Excess of assets over liabilities.
Assets are equal to liabilities.
Assets minus liabilities is equal to capital.
This is the equation.
Remember, what are the other names of capital?
Net worth.
N-E-T-W-O-R-T-H.
What are the other names of capital?
Equity.
The names of capital are net worth and equity.
Right Sir.
It was also written in our notes.
So, now you know the meaning of capital.
This was the meaning of capital, which you have been seeing
since childhood.
Right Sir.