(a) What is Capital? (b) Explain five types of Capital.

Answer Details

(a) Meaning of Capital

In commerce, capital is that part of wealth (man-made assets and money) which is set aside and used to produce further wealth, rather than for immediate consumption. It is one of the factors of production, and refers to all the assets, money and equipment employed in running a business to create goods and services and earn income.

(b) Five types of capital

1. Fixed capital: money invested in permanent (durable) assets that are used repeatedly in the business, such as land, buildings, machinery and vehicles.
2. Working (circulating) capital: capital used to meet the day-to-day running expenses of the business and which changes form in the course of trade, for example money for stock, wages and raw materials.
3. Liquid (floating) capital: capital held in the form of cash or assets that can quickly be turned into cash, such as bank balances and money owed by debtors.
4. Owned capital (owner's/equity capital): capital contributed by the owner(s) of the business, for example the proprietor's savings or shareholders' equity, on which no interest is fixed.
5. Loan (borrowed) capital: capital obtained from outsiders such as banks and debenture holders, which must be repaid, usually with interest.