Difference Between Capital and Asset

Capital vs Asset

Words like capital and asset are very frequently encountered by accountants and those involved in preparing financial statements of businesses. These are related concepts because of which sometimes people get confused whether it is capital or an asset that is the correct term to be utilized in the financial statement. There is also a term called capital asset that increases the dilemma of the students. These concepts will be clearly explained removing all doubts from the minds of the readers in this article.

In economics, capital, or financial capital to be precise, refers to the funds made available by investors and lenders to entrepreneurs to arrange (read buy) machinery and equipment for the production of goods. There are many other prefixes used with capital such as real capital or economic capital but the point to remember is that it is used to refer to money used for the production of goods.

In accounting or finance, anything that is tangible and can be sold in the market to get some money is referred to as an asset. Thus, they are economic resources and reflect the liquidity of a company or a business. A company is said to be the owner of a certain value after its assets are converted into money taking into consideration their market value. There are both tangible as well as intangible assets. Land, building property, factory, machinery, equipment, goods produced and cash held in bank accounts are all examples of tangible assets. On the other hand, patents, goodwill, copyrights etc are intangible assets whose monetary value is hard to assess, and they are not seen also. There is also a bifurcation by way of current assets and fixed assets, where all inventory is taken as fixed assets, whereas land, building machinery etc are called fixed assets.

It is the use of the term capital asset that creates all the confusion. It should not be construed as capital or the funds that are required by a company to make purchases of machinery to produce goods. It is a concept that treats all assets that can be used to make money or profit. For example, if a person has a pickup truck, it will be termed as capital asset, whereas his sports car, though much more expensive remains for personal enjoyment, and therefore not counted as a capital asset. Another definition of capital asset says that it is a kind of tangible asset that is not normally sold during the continuation of a business, but contributes to the ability of a business to make profits. As such, building, land, machinery etc may qualify as capital assets of a business, though they cannot be sold easily are vitally important in allowing the company to generate profits.