Capital

Accounting Terms Dictionary

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Capital

Capital is the amount of the business that belongs to the owners of a sole proprietorship.

In a related meaning, it is the amount of money plus any debt free equipment, buildings, and other assets that owners can use to run their business.

For example, let’s say the business owns one asset, a building for which they paid $200,000. They did not have $200,000 in cash to buy the building so they paid $20,000 and borrowed $180,000 from the bank. If the building were sold for $200,000 they would have to repay the bank $180,000 which would leave $20,000 in cash for them. The $20,000 is their capital. Most people would say, “I bought a building for $200,000. I own that building.” In reality, that’s not true. You owe the bank $180,000. You have a debt of $180,000. In reality the bank owns $180,000 of the building. You only own $20,000. $20,000 is your capital. People often say, “Do you have enough capital to start a business?” They mean do you own enough equipment and/or have enough money so that you can run a business without going bankrupt?” If you have a $20,000 truck with a $20,000 car note, that’s not capital. If you don’t pay, the bank can repossess the truck. It’s not yours; it’s not capital. The bank has a prior claim to the truck.

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