Difference Between Capital And Investment

What is the difference between investment and capital? Capital is source of funds, while investment is deployment of funds. Capital is shown in the liabilities side of the balance sheet, but investment is shown the asset side of the balance sheet. Capital account is the credit balance of the books of account, while investment is the debit balance of the books of account. Capital account represents the paid up capital of share, reserve, and surplus.

The difference between investment and capital is that capital is a factor of production while investment is not.

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In general, capital means the money, wealth, or financial assets of a business. These assets are held in various forms, used for expenditures, and represent a portion of a company's net worth. The use of capital to make more money for a business is called investment. Capital usually comes to a business at a cost of either interest or equity. To understand this, we'll look at the various types of capital.

Debt capital is money that businesses acquire through public or private sources to help run the business. Sources for debt capital include banks, credit unions, insurance companies, family, friends, and other lenders. The price of debt capital is the interest that businesses must pay on the money that they obtain in this way.

Equity capital is financing that businesses obtain in exchange for shares in the company. This may include private placements of stock or public stock offerings. The cost of equity capital to a company is the distributions that the business must make to its shareholders.

Working capital is a term that businesses use to signify the amount of funds that they have available for day-to-day operations. Working capital can be calculated as the amount of company assets available minus the amount of company liabilities. To break this down a little more, it means the amount coming in through accounts receivables (the invoices that companies send out after the delivery of products or the performance of services) plus the inventory the company is currently holding minus the company's accounts payables (the bills that the company owes to vendors, suppliers, and so on).

Capital assets is a term that refers to all the assets a company owns such as cash, securities, storage or production facilities, and equipment.

We see then that capital is a broad term with many facets. We can now turn to the meaning of investment. In short, investment is the use of money (capital) to generate income (or make more money).

There are several types of investment. Direct investment involves the purchase of specific assets such as factories, buildings, or other property. Indirect investment is the buying of securities and other assets sold on financial markets. In a broader sense, other actions taken with the intention of making more money in the future can be considered investments. For instance, spending the time and money to obtain more education so that you can make more money in the future can be considered an investment.

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A factor of production is any item used in the production of other goods and services. Machinery used in the manufacturing process is capital. You require capital to establish a business. Most people borrow money to launch a company. That's why the reward for capital as a factor of production is interest. It's also the reason why share capital and liabilities are on the same side of the balance sheet.

An investment is the amount of money or time that goes into a venture. When you invest, you have one objective: to gain something out of the endeavor. The gains can be in the form of cash or any other thing you deem valuable. For example, you invest in securities because you want to recoup your initial investment and make extra money on the side. Investments can help you increase your cash at hand. That’s why they're part of the assets on the balance sheet.

To conclude, capital can be converted into an investment. Here's how that happens: capital forms part of your wealth. In economic terms, your wealth is the total value of all things you own. For example, your business owns tractors that you use to cultivate land for farming. That tractor is part of your firm's wealth. It's also capital, because it's used in production. When you lease out that tractor to third parties, it becomes an investment, because you want to make some money from that agreement.

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Looking at this from an accounting perspective, which I’m assuming you mean as this is listed under the ‘Business’ topic and you speak of balance sheets, we can see distinct differences between investment and capital as follows:

Investment

Investment is short-term and long-term invests to increase the wealth of an organization and put its finances and other resources to work. In this way, these resources, financial and otherwise, produce for the organization, instead of sitting in a basic cash account and possibly earning significantly less interest.

Investing includes the purchasing and selling of resources. These resources can be used by a company to sell its products and/or services. A company’s finances fund the assets and the expectation is that these assets will produce benefits for the company down the road.

As the textbook ‘Fundamental Accounting Principles’ (Ninth Canadian Edition; Larson, Wild, Chiappetta, Nelson, Carroll, Zin; McGraw-Hill Ryerson – 1999) states, “Investing activities include the (a) purchase and sale of long-term assets, (b) the purchase and sale of short-term investments that are not cash equivalents, and (c) lending and collecting on loans other than those made by a financial institution.”

Think of investing on a personal plane. You invest for yourself and your family to increase your resources, especially your cash position. You may invest in stocks, government bonds (provincial, state, federal), GIC’s (Guaranteed Investment Certificates), corporate bonds and the like. You, like businesses, are looking to also increase wealth - the wealth of you and your family.

Capital

Capital is indeed the source of funds as noted above. You need capital to engage in investing activities. From an accounting perspective, an organization’s capital structure is its sources of financing. You can learn a lot about the solvency of an entity by looking at its capital structure. This includes equity capital and short-term financing. Equity is an owner’s or a group of owners claim on the business’s assets.

As you consider Investments that we talked about above, recognize that owner’s equity grows by and an owner’s investments and revenues. Now, on the left side of the balance sheet capital is also cash, as an example, a financial asset.  Moreover, capital assets of a company are looked at by lenders as security for loans they make to a business.

On an organizations balance sheet capital assets include plant & equipment, factories, buildings, as well as land which are all long-term tangible assets. Capital assets additionally include intangible assets. Intangible assets include copyrights, patents, goodwill, trade names and trade names. These assets do not have a physical presence, but they are used to sell products and services.

The thing with capital assets is that a company expects to realize benefits from them for greater than one period. Also consider capital expenditures – the additional cost of capital assets.

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Yes, what you have is mostly accurate.  Capital is what you have at any point, and investments are not easily accessible.  However even though you are spending with investments, you are spending in order to get a return.  You are going to be earning a return on that investment, and once you cash out the investment you should have more capital.

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