Difference Between Equity and Capital

Equity vs Capital
 

Equity and capital are both terms used to describe the ownership or monetary interest in the company that is held by the company’s owners. The meaning of both terms can vary according to the context for which they are used and the application varies depending on the subject matter being discussed. Equity and capital are terms so closely related to each other that they are often misunderstood to be the same. The following article represents a clear overview of the two and outlines their differences.

What is Capital?

Capital in the usual context of accounting and finance means the amount of funds that is contributed by the owners or investors of the business, to purchase assets or capital equipment required for the running of the business. Capital is also divided into financial capital, real or economic capital, shareholder’s capital, etc.

Financial capital is usually used to refer to the financial and monitory wealth that is accumulated and saved in order to start up a business or for investment in an existing business. Financial capital is further subcategorized into productive capital that is used in the day to day operations of the business and regulatory capital which is usually held by a business due to regulatory capital requirements enforced by law.

Real or economic capital, on the other hand, refers to goods that are purchased by businesses for use in production of other goods. For example, tools and machinery used in the production of cars would be real or economic capital for the business.

What is Equity?

Equity represents the claim that shareholders have, once the liabilities have been reduced from business assets. When assets exceed liabilities, positive equity exists and in the case that liabilities are higher than assets, the company will have a negative equity.

Taking an example; a house for which no debt remains is the owner’s equity, as the owner has complete ownership over the house and can sell it as he pleases. Equity may also refer to ‘shareholder’s equity’ which is the proportion of equity investment held by a shareholder depending on the value of the shares purchased and held.

Capital vs Equity

The similarity between equity and capital is that they both represent interest that owners hold in a business whether it is funds, shares or assets. Furthermore, capital is used in calculation when deriving the value of equity, as shareholders equity is the sum total of financial capital contributed by the owners and the retained earnings in the balance sheet.

Measuring the ownership interest held in a business in terms of equity may give a clearer picture as it shows the actual value once liabilities have been reduced.