Classwork Exercise And Series (Commerce- SS3): Capital

Definition of Capital

Accountant’s view; Accountant’s defined capital as the net worth of a business; capital is seen as the original fund with which a person starts a business. He considers capital as synonymous to money; it is the excess of assets over liabilities

The Economist view of the definition of capital; To the Economist, Capital is known to be one of the factors of production.

The layman’s view of the definition of capital; To an ordinary man, capital is defined as the total amount of money available for running a business.

Types of Capital

1. Authorized, Registered or nominal capital: This is the total amount of money which a company or an organization is allowed to issued out to public. It is the amount stated in the memorandum of association and approved by the registrars of companies which a company can issue out for subscription.
2. Issued capital: This is part of the nominal capital that the company is willing to issue out to the public for subscription at a particular point in time.
3. Called up capital: This is part of the issued capital that the people have been asked to make payment for.
4. Paid up capital: This is part of the called up capital which the shareholders have paid for.
5. Uncalled capital: This is part of the issued capital which that is yet to be called up for payment.
6. Loan capital: This is the total amount of money borrowed from external sources to run a business.
7. Capital owned: This is the excess of value of asset of a business over its liability. It is the net worth of a business.
8. Capital employed: This is the total asset of a business both fixed and current asset. It is the total value of the resources used in running a business.
9. Liquid capital: This is the asset that can easily be converted to cash
10. Fixed capital: This is the durable capital of a business; it is used continuously for further production. They are not for immediate consumption but for production of other goods.
11. Working or circulating capital: This is the ready and available funds for business daily transaction i.e cash at hand. It is the money available for payment of wages and salaries, buying of raw materials, money available for transportation and every day to day expense. Working capital can be calculated as Current Assets – Current Liabilities.

Importance of Working Capital.

• It helps to determine the funds that will be available for running a business.
• It helps to know if the business is solvent or not i.e to know if the business have the ability to settle debt without selling fixed asset
• It serves as a check against holding down too much money for current asset.
• It is a sign to show the healthiness of a business, working capital help an investor to know if to invest in a business or not.
• Working capital helps to determine the funds that will be available for the running of the business on a daily basis.
• The life span of any business depends on its working capital
• It helps bankers in determining either to grant loan or overdraft to customers.

Meaning Of profit

Profit can be defined as the financial gain or benefit which a firm realizes from his business or transaction dealings. Profit also relates to the gain resulting from investing one’s capital in a business. The purpose or motive of any business is to make profit.

To the economist profit is the reward an entrepreneur gets for risk taking in starting a business or a company while the accountant sees profit as the excess of income over expenditure.

Types of Profit

1. Gross profit: Gross profit is the differences between the total sales for goods and cost of goods sold.
2. Net profit: It is the excess of gross profit over the selling, distribution and administration expenses.

Turnover

This is the value of total sales of an organization during an accounting period. The turnover of a business is another name for sale.

Rate of turnover: This is the number of times the value of average stock of a business is sold during the year. The rate of turnover varies from one product to another. Expensive goods have slow turnover rate while perishable goods have rapid rate.

Factors that can affect turnover

1. The goodwill and reputation of the seller
2. The types of goods
3. Advertisement and sales promotion
4. Nearness of the business to consumer
5. Reduction in prices
6. Increase in the quantity of goods sold
7. Constant availability of goods.

Test and Exercise

1. The kind of capital made up of assets that can easily be converted to money is (a)Fixed capital (b)Loan capital (c)Liquid capital (d)Working capital.
2. One of the importance of working capital is (a)It helps to know if a business is solvent (b)It is the capital that a company can issue out (c)It helps to determine the profit of a business (d)All of the above.
3. ————– defined capital as the fund for the production of other goods (a)The accountants (b)the layman (c) none of the above (d)the economists
4. Working capital can be calculated as (a)current liabilities – current assets (b)current asset+ current liabilities (c)current asset-closing stock (d)current assets-current liabilities.
5. All of these factors can affect turnover except (a)Goodwill and reputation (b)nearness of business to customers (c)advertisement and promotion (d)decrease in the quantity of goods sold.

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