The term capital has many meanings and definitions. Some definitions refer to capital as any non-financial asset used in the production of goods and services. Other definitions state that capital is the financial value of assets such as funds held in accounts or cash on hand. Additionally, capital in economics is tangible assets including machinery and equipment used to produce goods. Some define capital as the wealth or financial strength of an individual or company. However, when referring to capital in economics, the term refers to factors of production used to create goods that are not themselves part of the production process.
A Closer Look at Economic Capital
Economic capital is the total assets a company needs to stay solvent. A company’s capital assets are significant because organizations use capital assets to create wealth. There are several classifications of capital in economics, which many company accountants divide into two categories:
Physical Capital– This category of capital is created by a labor force and is one of the factors of production. An example of physical capital would be buildings or machinery.
Natural Capital– This category of capital assets is any natural resource used in the production process. Examples of natural capital include minerals or land.
Economic Capital Features
Certain features determine whether or not an asset is considered capital. One feature is if a company can use the asset in the production of goods or services. If it can, then the asset is a capital asset in economics and part of the factors of production.
Another feature is financial capital. Companies can liquidate this form of capital into money for trade and put that money into financial markets. The value of financial capital is based on market perceptions and what other people and other organizations are willing to pay for that capital. Other forms and features of capital include brand capital, instructional capital and human capital.
Debt/Equity Capital and Depreciation
Companies can acquire capital by assuming the debt of another company. Companies who assume debt capital expect to earn revenues through debt repayment plus interest. Equity capital includes money from the sale of stocks or bonds, or it can include any money from private investments by owners of a business. Tangible capital assets are subject to depreciation. The normal wear and tear on any asset cause the asset to lose some of its value. Some companies can use the depreciation of assets as tax deductions, which are noted on the company’s financial statements.