Financial Capital is the money or wealth needed to produce goods and services. In the most basic terms, it is money. Capital can also refer to money invested in a business to purchase assets.
What is Financial Capital?
Financial capital is any economic resource measured in terms of money used by entrepreneurs and businesses. To buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. retail, corporate, investment banking, etc.
Also known as net assets or equity, financial capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Financial Capital increases or decreases due the following,
- Initial and Additional contributions of Owner/s (Investments)
- Withdrawals made by Owner/s (Dividends for corporations)
- Income
- Expenses
Owner contributions and income increase capital. Withdrawals and expenses decrease it. Therefore, Income and expense are ultimately included as part of capital.
Learn More : Understanding Accounting for Capital Assets
The terms used to refer to a company’s capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is called Owner’s Equity or Owner’s Capital; in partnerships, it is called Partners’ Equity or Partners’ Capital; and in corporations, Stockholders’ Equity.
Income in Financial Capital
Income refers to an increase in economic benefit during the accounting period in the form of an increase in asset or a decrease in liability that results in increase in equity, other than contribution from owners.
Revenues refer to the amounts earned from the company’s ordinary course of business such as professional fees or service revenue for service companies and sales for merchandising and manufacturing concerns. Income encompasses revenues and gains.
Read More : 8 Advantages of Financial Planning to Make You a Better Entrepreneur
Gains come from other activities, such as gain on sale of equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales.
Expense in Financial Capital
Expenses are decreases in economic benefit during the accounting period in the form of a decrease in asset or an increase in liability that result in decrease in equity, other than distribution to owners.
Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and losses such as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of financial capital. Net income refers to all income minus all expenses.
Financial Capital in a business refers to the portion of the assets available to the owners of the business after all liabilities are settled.
Capital = Assets – Liabilities
Do You Know What Is Financial Capital in The Business World? Comment them on Trdinoo for others to learn. Please subscribe and share us with your friends and networks.
