Difference Between Capital & Assets

Image Credit: FJZEA/iStock/GettyImages

Capital and asset are business terms. Capital is always an asset, while an asset might not be capital. They words may be used in slightly different contexts, depending on the situation, and there are several variations of each term. For example, there is capital, working capital, legal capital and paid-in capital.

Advertisement

Assets can be long-term, fixed, liquid or current. The word "capital" often refers to the money a business owner has invested in a business, representing the difference between the business's assets and liabilities. "Capital" also refers to the money a business has to work with. Assets are things that add value to a business, such as cash, machinery, trademarks, patents or inventory.

Advertisement

Video of the Day

Assets as Property

A simple explanation that often works is that capital is money or cash invested and available to run a business, while assets are equipment or other business property. In this description, assets include buildings, office furniture, machines, computers and other equipment that has value.

Advertisement

Theoretically, assets could be sold to bring money to the business. Assets can also be depreciated in different ways, helping decrease a business's tax liability. Personal assets might include jewelry, electronic equipment, paintings, collectibles and other items of value. Check with your insurance company to see if your current policy covers all of your assets – you might need to buy extra to cover assets like collections or art.

Advertisement

Capital as Used for Capital Expenses

The term "capital expense" or "capital expenditure" means a use of capital or operating cash to purchase or improve an asset that will bring long term value to a business. In this case, buying a building, paving a parking lot or renovating an office would all be capital expenses that improve assets. These costs are differentiated from regular expenses for consumables such as paper, printer toner and cleaning supplies.

Advertisement

Capital as Cash

Another simple way that capital and assets are differentiated is by liquidity. Capital is often defined as the cash on hand that can quickly be used to help the business. Assets are non-liquid and are not immediately available for use. However, they do add value to a business.

Advertisement

Assets as Providing Monetary Value

Assets are also defined as anything owned by the company with monetary value. Under this definition, not only are physical objects such as buildings and machines considered assets, but so too are intangibles such as trademarks, brand names, stock and accounts receivable. Assets are current (a life of one year or less) or non-current (a life of longer than a year, such as equipment).

Advertisement

Capital as Net Worth

Another way to define capital is the difference between the assets and liabilities of the company. In this case, capital is synonymous with equity or net worth. In a public corporation, this is stockholder equity. The difference between current assets and current liabilities is known as working capital. In some cases, loans and debt are classified as capital because they can be used to help a company pay bills and increase profits.

Advertisement

references