Monday, February 16, 2015

Capital and Assets

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# Readers' Question
What is the difference between capital and asset?

Assets
Assets are those tangible and intangible things that you own. You can sell them in the market to get money, or you can retain those for your personal enjoyment. Also, there are some assets which you cannot directly sell to get the money, or the value of the asset cannot be properly assessed.

  • Tangible Assets - land, building, machinery and equipment, goods, raw materials, factory, cash in bank accounts, etc.
  • Intangible Assets - patents, copyrights, goodwill, etc. Monetary value of these intangible assets is hard to assess. 
Assets can also be classified depending on liquidity  -
  • Fixed assets (property, plant and equipment, i.e., PP&E, which cannot be easily converted into cash)
  • Current assets (liquid assets like cash or bank accounts, which are easily convertible into cash)

Capital

Capital is the fund that is required to run a business, like buying machinery and equipment, etc., to produce goods and services. Generally, funds are arranged from the investors and the lenders.

Only those assets, which are used to make money, or to run business, or to produce goods and services, are considered as Capital.

Now, consider the following example -
Suppose you have bought a van which is used in your business to make profit, then this asset can be considered as Capital Asset, whereas if you have bought a luxury car, which is for your personal use only, but of no-value for your business, then it will be your Asset, not a Capital Asset.

Now, don't confuse Capital Assets with Capital. Capital is only fund, taken from the investors or lenders to run business. Funds taken as loans from banks or bonds from investors will be liabilities of the business, which need to pay back, but is the Capital for the business. Funds taken from shareholders are also Capital, but is not a liability for the business.


Hope this article will help you learn the difference between capital and assets. If there is any doubt please feel free to contact or mail - bankoncepts@gmail.com

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Happy learning!

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