Capital Account

Examples of Capital Account in the following topics:

• The Capital Account

  • The capital account acts as a sort of miscellaneous account, measuring non-produced and non-financial assets, as well as capital transfers.
  • There are two common definitions of the capital account in economics.
  • Instead, the capital account acts as a sort of miscellaneous account, measuring non-produced and non-financial assets, as well as capital transfers.
  • The capital account is normally much smaller than the financial and current accounts.
  • The capital account can be split into two categories: non-produced and non-financial assets, and capital transfers.

• Closing the Cycle

  • Only revenue, expense, and dividend accounts are closed—not asset, liability, Capital Stock, or Retained Earnings accounts.
  • Closing the revenue accounts—transferring the balances in the revenue accounts to a clearing account called Income Summary.
  • Closing the expense accounts—transferring the balances in the expense accounts to a clearing account called Income Summary.
  • Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account (also known as the capital account).
  • Closing the Dividends account—transferring the balance of the Dividends account to the Retained Earnings Account

• Calculating Expected Value

  • The main accounts which affect the value of working capital are accounts receivable, inventory, and accounts payable.
  • The management of working capital involves managing inventories, accounts receivable and payable, and cash.
  • As an example, imagine a company has accounts receivable of $10,000, current inventory that has a value of $5,000, and accounts payable of $7,000.
  • We can find working capital by:
  • Working capital is equal to accounts receivable, plus current inventory, minus accounts payable.

• Double-Entry Bookkeeping

  • In the double-entry accounting system, each accounting entry records related pairs of financial transactions for asset, liability, income, expense, or capital accounts.
  • The accounting entries are recorded in the "Books of Accounts".
  • Real accounts are assets.
  • Under this approach, transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital.
  • Capital account: Credit increases in capital and debit decreases in capital

• Understanding the Needs of the Business

  • However, too much working capital can carry with it a higher cost of capital.
  • The management of working capital involves managing inventories, accounts receivable and payable, and cash.
  • Current assets and current liabilities include three accounts which are of special importance.
  • These accounts represent the areas of the business where managers have the most direct impact:
  • Large companies possess resources to help them manage this tradeoff, such as an accounting department, negotiating power with their suppliers, or access to the capital markets.

• The Imperative of Liquidity

  • If I have capital, I can spend it.
  • Cash flows must take into account not only amounts of capital, but the time value and availability of said capital.
  • Capital A has the majority of their money wrapped up in inventory (i.e. holding products for sale) which they expect to sell within 4 weeks, while Company C has their capital in a savings account.
  • Business managers and accountants, when considering their investment options, should keep liquidity in mind at all times.
  • The decision of how much cash to invest, and where to invest it, is therefore a key consideration when balancing accounts for an organization.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
  • It is an important consideration the firm must take into account when making corporate decisions.
  • Describe how the cost of capital influences a company's capital budget

• Cost of Capital Considerations

  • Cost of capital is important in deciding how a company will structure its capital so to receive the highest possible return on investment.
  • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
  • For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.
  • The weighted average cost of capital multiplies the cost of each security by the percentage of total capital taken up by the particular security, and then adds up the results from each security involved in the total capital of the company.
  • Describe the influence of a company's cost of capital on its capital structure and investment decisions

• Defining Capital

  • In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services.
  • Capital goods are used in the production process and may depreciated through accounting practice to incorporate utilization, though they are not consumed.
  • Physical Capital: capital that must be produced by human labor before it can become a factor of production (also referred to as manufactured capital).
  • Interest allows capital to be obtained, while profit is the accumulation of the capital.
  • Social Capital is capital that is captured as goodwill or brand value.

• Decision Criteria

  • The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
  • Working capital is the amount of capital which is readily available to an organization.
  • As a management tool, this metric makes explicit the interrelatedness of decisions regarding inventories, accounts receivable and payable, and cash.
  • Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
  • Cash conversion cycle is a main criteria for working capital management.