Overview of Capital
Capital refers to the financial resources of a business that are used to pay for its operations. The financial assets invested in the business by the owners form a part of the capital. It includes cash or cash equivalents, plant, machinery, etc.
Generally, There are four types of capital:
- Debt Capital: The capital that is acquired by borrowing from banks or other financial institutions is called debt capital. It is to be repaid along with interest at a certain percentage of the loan.
- Equity Capital: It is the capital collected from the owners in exchange for a common or preferred stock (shares). It is to be paid only when the company goes under liquidation.
- Working Capital: The capital that is used to fund day-to-day operations is called working capital. It is calculated as the current assets minus the current liabilities.
- Trading Capital: The capital available to the business to buy and sell securities in the financial markets is called trading capital. This type applies exclusively to the financial industry.
In accounting terms, capital is a liability for the business, i.e. it is to be repaid in the future. Thus, capital is credited to the books of accounts.
As per the Modern Rules of Accounting
|Capital||Credit (Cr.)||Debit (Dr.)|
Capital is Credited (Cr.) when increased and Debited (Dr.) when decreased.
Why is it like this?
This is a rule of accounting that cannot be broken under any circumstances.
How is it done?
Suppose, the partners of a firm introduced additional cash in the firm. This additional cash is an increase in the capital of the organization. As per the Modern Rules, this increase in capital is credited to the “Partners’ Capital Account”.
|To Partners’ Capital Account A/c||Credit|
(The additional capital is credited to the partner’s capital account.)
As per the Golden Rules of Accounting
|Account||Rule for Debit||Rule for Credit|
|Personal||Debit the receiver||Credit the giver|
Capital is credited as per the Golden Rules.
An account is said to be personal when it is related to firms, companies, individuals, etc. Capital is a liability for the firm/company/business because it is obliged to repay its owner, hence, it is a personal account. A personal account is recorded on the balance sheet of the organization.
As per the golden rules of accounting (for personal accounts), capital is credited. In other words, the giver of the benefit (owner) is a liability to the one who receives it (organization).
For instance, in a sole proprietorship, the proprietor invests their own money into the business to acquire different assets. The money thus invested is the Capital of the business and the balance sheet will show it as the “Capital Account”. Thus, the increase in capital is credited.
|To Capital Account A/c||Credit|
(Recording the funds of the owner)
Capital Inside Trial Balance
Capital shows a credit balance in the trial balance. A trial balance example showing a credit balance for capital is provided below.