CAPITAL, a stock of wealth existing at a given instant of time is called capi tal; a flow of benefits from wealth through a period of time is called in come. Many authors restrict the name capital to a particular kind or species of wealth, or to wealth used for a par ticular purpose, such as the production of new wealth; in short, to some specific part of wealth instead of any or all of it. Such a limitation, however, is not only difficult to make, but cripples the usefulness of the concept in economic analysis.
When a given collection capital is measured in terms of the quantities of the various goods of which it is com posed, it is called capital goods; when it is measured in terms of its value, it is sometimes called capital value.
One of the best methods of understand ing the nature of capital is to under stand the method of keeping capital ac counts.
A capital account or balance sheet is a statement of the quantity and value of the wealth of a specific owner at any instant of time. It consists of two col umns—the assets and the liabilities— the positive and negative items of his capital. The liabilities of an owner are his debts and obligations to others; that is, they are the property rights of others for which this owner is responsible. The assets or resources of the owner include all his capital, irrespective of his lia bilities. These assets include both the capital which makes good the liabilities, and that, if any, in excess of the lia bilities.
The owner may be either a physical human being or an abstract entity called a "fictitious person" made up of a col lection of human beings and keeping a balance sheet distinct from those of the individuals composing it. Examples of fictitious persons are an association, a partnership, a joint stock company, a government. With respect to a debt or liability, the person who owes it is the debtor, and the person owed is the cred itor. The difference in value between the total assets and the total liabilities in any capital account is called the net capital, or capital balance of the person or company whose account it is.
A fictitious person is to be regarded as owning all the capital nominally in trusted to it and as owing its individual members for their respective shares; consequently there is no net capital bal ance belonging to the fictitious person, although in most cases there is a lia bility item called capital which repre sents what is owed to those most respon sible for the management of the busi ness. The most important example of a fictitious person is a joint stock com pany. Associated with the stockholders are usually also bondholders without vot ing power, but with the right to receive fixed payments stipulated in the bonds which they hold. The "capital" item in the capital account of a joint stock com pany is a liability due to the stockhold ers. It represents what is left after the value of all other liabilities is deducted from the value of the assets.
The items in a capital account are constantly changing, as also their val ues; so that, after one statement of as sets and liabilities is drawn up, and an other is constructed at a later time. the balancing item, or net capital, may have changed considerably. However, book keepers are accustomed to keep this re corded "capital" or "capital balance" item unchanged from the beginning of their account, and to characterize any increase of it as "surplus" or "undivided profits" rather than as capital.
The bookkeeper systematically under values the assets of the company and even omits some valuable assets alto gether, such as "good will". The object of a conservative business man in keep ing his books is not to obtain mathemati cal accuracy, but to make so conservative a valuation as to be well within the re quirements of the law and expediency.
There are two valuations of the capi tal of a company, the bookkeeper's and the market's. The latter, being more frequently revised, is apt to be the truer of the two, although it must be remem bered that each of them is merely an appraisement.