What is Capital In Accounting - Definition - Meaning - Examples - Explanation

Any amount which is invested by the owner of the business into the business is called capital in sole proprietorship type of business. The owner may invest Cash or Goods (Goods Purchased or Purchases) to start the business.

For example, if Mr. A, as a Sole Owner, invested Cash For Rs. 100000 to start the business on 1^st July, 2018. then here Capital is the right of the owner who invested in his business. The Accounting Journal Entry for Capital account is shown below:

Capital Journal Entry

                                                            Cash a/c     100000

                                                                         Capital a/c    100000

(Cash invested into the Business to start it)

When Goods invested by the owner for Rs. 50000, then the journal entry is shown below:


                                                           Purchases a/c     50000

                                                                                 
                                                                                Capital a/c  500000


                            (Goods invested By the Sole Owner into the Business to start it)     


Capital T- Account is prepared to record all Journal Entries related to it. At the end of accounting period, Capital is transferred to Balance Sheet Under Liabilities & Owner’s Equity Side.

Capital Debit Or Credit

The normal balance of Capital is credited. However, when it is invested into the business, then it is credited but when it decreases we debit it as in case of Contra Equity Account that is Drawings Account deducted from closing balance of capital on Balance Sheet.

Capital is also known as Owner's Equity. Statement of Owner's Equity is prepared to find out the ending balance of Capital or Total Owner's Equity to be shown on Balance Sheet at the end of accounting period.

Is Capital An Asset?

No, it is the invested amount to finance the business or to start the business while an Asset is the rights of business provided by either owners of the business or outsiders. So Asset are always equal to Liabilities and Owner’s Equity. It is an Accounting Equation which we mathematically can write as shown below:

Assets = Liabilities + Owners’ Equity

Why Capital is Shown In Liabilities Side?

Because, it is the rights of owners of the business to whom the assets of the business established for the profitable activities of the business. Basically, there are two types of Liabilities. External Liabilities and Internal Liabilities. Internal liabilities are payable by the business to the owners of the business and it is known as Equity i.e., the right of the owners of the business while external liabilities are known as Liabilities. So, Equity are recorded on Liabilities & Owner's Equity Side Under the Section of Equity in the Balance Sheet.