Both capital and equity are used to describe the ownership of the company owners but they are not the same at all. Equity refers to the owner’s share of the assets of a business while capital describes the owner’s investment of assets into a business. In fact, capital is the subcategory of owner’s equity. These two terms are so closely related that many people often misunderstood them to be the same.
According to the accounting language, equity is the value of assets that are left after paying off the Liabilities. On the other hand, capital is the fund that the owners or investors have contributed to buy the assets or equipment that are required to run the business. Below you will find information that represents a clear overview of capital and equity as well as outlines their differences.
Jump To A Section
- 1 What Is Equity?
- 2 Different Types Of Equity
- 3 What Is Capital?
- 4 FAQs About Capital VS Equity
- 4.1 1. Is Equity An Asset?
- 4.2 2. What Are Examples Of Capital?
- 4.3 3. What Is The Difference Between Capital And Money?
- 4.4 4. What Are The Two Main Sources Of Capital?
- 4.5 5. What Does It Mean To Have 20% Equity?
- 4.6 6. Is Equity Real Money?
- 4.7 7. How Is The Equity Ratio Calculated?
- 4.8 8. Can I Use My Equity As A Deposit?
- 4.9 9. How Much Equity Do I Need To Refinance?
What Is Equity?
“Equity is important because it represents the value of an investor’s stake in a company, represented by their proportion of the company’s shares. This for equity through owning stock in a company gives shareholders the potential for capital gains as well as dividends.”
Moreover, equity can also represent the book value of a company. In many circumstances, equity is offered as payment-in-kind.
Different Types Of Equity
Depending on the business structure; there are two common types of equity:
1. Stockholders’ equity
2. Owner’s equity
Stockholders’ equity is also known as shareholders’ equity and it is the number of assets given to shareholders after deducting liabilities. There is a formula that you can use to determine the equity of a firm –
The required information for this equation can be found on the balance sheet. You can follow the below steps to collect the data:
1. Locate the company’s total assets on the balance sheet for the period
2. Locate total liabilities, which should be listed separately on the balance sheet
3. Subtract total assets from total liabilities to arrive at shareholder equity
4. Note that total assets will equal the sum of liabilities and total equity
Owner’s equity indicates the amount of ownership a person has in a business. It is one of the three main elements of a sole proprietorship’s balance sheet. Here is the formula –
Owner’s Equity = Assets – Liabilities
The owner’s equity is considered as a residual claim on the business assets because liabilities have a higher claim. On many occasions, it is also considered a source of business assets. Moreover, it also shows how much available capital a small business has.
What Is Capital?
Capital is a key element of accounting and finance and it means the number of funds that are contributed by the owners or investors of the business. Sometimes it is associated with the capital assets of a company that requires a large amount of capital to finance or expand. According to Investopedia –
“Capital can be held through financial assets or raised from debt or equity financing. Businesses will typically focus on three types of business capital: working capital, equity capital, and debt capital.”
Different Types Of Capital
There are three main types of capital. They are:
1. Economic Capital
2. Natural Capital
3. Human Capital
Economic Capital: This is the amount of capital that a company has to make sure that it remains solvent given its risk profile. Economic capital is usually calculated by the company.
Natural Capital: This term is used for the stock of renewable and non-renewable resources that includes minerals; water; waste assimilation; carbon dioxide absorption; arable land; habitat; fossil fuels; erosion control; recreation; visual amenity; biodiversity; temperature regulation and oxygen.
Human Capital: It is an intangible asset or quality that is not listed on a company’s balance sheet. Some example of human capital is the worker’s experience, skills, loyalty, punctuality, education, training, etc.
FAQs About Capital VS Equity
1. Is Equity An Asset?
No, equity is not an asset. For a company, equity is the money that is provided by the owners whereas assets are things that are bought by the company and have a value attached to them. Equity is the net worth of the company but assets are the valuable things of the company.
2. What Are Examples Of Capital?
Capital is not the same as money. Some common examples of capital are deposit accounts, tangible machinery, storage buildings, company cars, patents, software, brand names, bank accounts, stock, etc.
3. What Is The Difference Between Capital And Money?
There is a significant difference between capital and money. Money is a means of exchanging one good for another while capital is measured in monetary terms and it involves risk and creates jobs.
4. What Are The Two Main Sources Of Capital?
The two main sources of capital are debt financing and equity financing. Debt financing means you borrow money and then repay it with interest. On the other hand, in equity financing money is invested in exchange for part of ownership.
5. What Does It Mean To Have 20% Equity?
Think, you bought a product with a 20% payment and you will pay the rest of the money in installment. It means you have 20% equity for that product. Once you started to pay the rest of the money; your equity for that product will start to increase.
6. Is Equity Real Money?
No, equity is not real money. It’s the value of your property that you will get if you sell the property. It is just a “mental concept” that our property is worth $X.
7. How Is The Equity Ratio Calculated?
The calculation of the equity ratio is very simple. Divide the total equity by total assets and you will have your equity ratio.
8. Can I Use My Equity As A Deposit?
Yes, you can use your equity as a deposit. You can use the equity for the investment loan and borrow up to 80% of the property value if you want.
9. How Much Equity Do I Need To Refinance?
You have to refinance at least 20% of your equity. However, if you have less than 20% equity but have a good credit rating then you can refinance without the 20% percent equity.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.