What is ‘Capital’
Capital refers to financial assets or the financial value of assets, such as cash and funds held in deposit accounts, as well as the tangible machinery and production equipment used in environments such as factories and other manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the production and storage of the manufactured goods. Materials used and consumed as part of the manufacturing process do not qualify.
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BREAKING DOWN ‘Capital’
While money is used simply to purchase goods and services for consumption, capital is more durable and is used to generate wealth through investment. Examples of capital include automobiles, patents. software and brand names. All of these items are inputs that can be used to create wealth. Besides being used in production, capital can be rented out for a monthly or annual fee to create wealth, or it can be sold when it is no longer required.
Ongoing Service to Business
In order to qualify as capital, the goods must provide an ongoing service to the business to create wealth. Capital must be combined with labor, the work of individuals who exchange their time and skills for money, to create value. By investing in capital and foregoing current consumption, a business or individual can direct those efforts into future prosperity.
The assertion of property rights designates the value of associated capital. Individuals or companies can claim ownership to their capital and direct its function to suit their needs. Ownership of capital can also be transferred to another individual or corporation with any resulting proceeds from the sale being directed to the previous owner. For example, a business can sell a piece of production equipment to another facility in exchange for cash. The purchasing facility becomes the new owner of the equipment and the selling business can include the funds as revenue.
A business can acquire capital through the assumption of debt. Debt capital can be obtained through private sources, such as friends and family, financial institutions and insurance companies, or through public sources, such as federal loan programs.
Equity capital is based on investments that, unlike debt capital, do not need to be repaid. This can include private investment by the business owners, as well as contributions derived from the sale of stock.
Tangible assets that function as capital within a business are subject to depreciation, which occurs as normal wear and tear on an item diminishes its overall value. Depreciation is often noted on a business’s financial statements and may be eligible for use as tax deductions.