SS2 Commerce Lesson Note on Capital

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TOPIC: CAPITAL

CONTENT:

1. Meaning of Capital
2. Types of Capital
3. Importance of Working Capital.

Sub-topic 1: Meaning of Capital

This is the total amount of money employed to run a business. It represents any form of wealth set aside for the production of further wealth.

There are two schools of thought or views above the above definition. These views are the accountant point of view and the economist point of view.

Accountant’s Definition of Capital: This is the total assets of a business entity, less its liability due to third parties outside the firm. It is also the original money with which a person used to start a business. It can be derived as follows:

Total Assets―All liabilities =Capital.

Economists’ Definition of Capital: Capital is wealth reserved or used for the production of more wealth. It is also referred to as any man-made tool or equipment that helps in the production of goods and services.

Layman’s Concepts

To the layman, capital is the total amount of money for running a business.

Evaluation:

Define Capital.

Sub-topic 2: Types of Capital

There are various types of business capital. These are:

1. Authorized /Registered/Nominal Capital: This is the total amount stated in the Memorandum of Association and approved by the registrar of companies which a company can issue out for subscription.
2. Issued Capital: This is part of authorized capital which has been approved and the company decides to issue out to the public for subscription. For example, if ₦10 million worth the share is registered and half of it is being issued out for subscription, this half is called issued share capital.
3. Called Up Capital: This is part of the issued capital that has been called up, and the shareholders have been asked to make payment. For example if ₦10 million in ₦1 shares, the company may not require the total amount immediately. It request that part of it be paid.
4. Capital Employed: This is the total capital raised to finance the running of a business. It is total assets, both fixed and current, less current liabilities. It is derived as Total Assets ― Current Liabilities = Capital
5. Liquid Capital: This is made up of assets that can be easily converted into cash or money or assets that can be converted into money at short notice. Examples are cash, near-money-debt, and inventories.
6. Circulating or Floating Capital:

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