The capital and drawings are both well known and generously used terms within the business world. However, they are often misunderstood by those with less familiarity to business terms and concepts.
Every business, be it a startup or a running business, needs a strong and stable capital structure to survive and thrive. On the other hand, drawings from a business act as a contra-capital movement where funds from a business are fetched out by the investors. The article below looks into the concept of capital and drawings and the key differences between them.
In context of business and finance , the term capital refers to the total amount of money invested in a commercial entity by its owners and promoters for the purposes of establishing and running a business. However, practically speaking, capital is a broader term that may includes anything invested into a business. Owners can bring capital to their business in the form of cash or non-cash assets in any shape such as plant and machinery, intellectual properties, tangible properties like land and building etc.
Once brought to the business, the amount of capital is invested in different assets and processes for running day-to-day operations. As stated earlier, capital is an essential item to start a business. If an individual wants to set up a sole proprietorship , he will be solely responsible to manage the whole amount of capital to finance his business. However, with mutual consultation among all the partners, a person can be accepted as partner into the firm without capital just on the basis of his skills, knowledge, capabilities and wisdom.
In case of a company , the capital is divided into smaller denominations of fixed amounts known as shares. These shares are sold and issued to individuals and organizations to raise initial capital and start operations. The individuals and organizations to whom share certificates are sold become the shareholders or stockholders and enjoy the ownership status in the company.
Such arrangement of raising capital by companies is typically termed as equity financing. Referal Code Referal Code is required. How did you come to know about us?
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Contra Liability Account A contra liability account is a liability account that is debited in order to offset a credit to another liability account.
How Dangling Debit Works A dangling debit is a debit entry with no offsetting credit entry that occurs when a company purchases goodwill or services to create a debit. Contra Account Definition A contra account is an account used in a general ledger to reduce the value of a related account. A contra account's natural balance is the opposite of the associated account.
What Is Reconciliation in Accounting? Reconciliation is an accounting process that compares two sets of records to check that figures are correct, and can be used for personal or business reconciliations. What Is Petty Cash? Petty cash is a small amount of cash on hand used for paying expenses too small to merit writing a check. Learn how to balance petty cash in accounting. Breaking Down Debits A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet.
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