Capital refers to the money or assets brought into the business by the owner to start or operate it. It represents the owner’s financial share or claim in the business and is treated as a liability from the business’s perspective, since the business is considered separate from its owner. Capital is essential for purchasing assets, covering expenses, and keeping operations running.
It increases when the owner adds more funds or the business earns profits, and decreases when there are losses or withdrawals (drawings) by the owner. Maintaining accurate capital records helps assess the financial position and growth of the business over time.
Key Points:
- Capital is the owner’s investment used to start or grow the business.
- Treated as a liability because it is repayable to the owner.
- Recorded on the liabilities side of the Balance Sheet.
- It is used for buying assets, paying operating expenses, and meeting other financial needs.
- Capital changes due to profit/loss or additional investment/drawings by the owner.
- Crucial for evaluating the financial strength and long-term stability of the business.
Examples:
- Owner invests ₹2,00,000 to start a business – recorded as capital.
- A ₹20,000 profit increases capital; ₹10,000 withdrawn decreases it.