Capital in economics and finance: assets, production, and accounting

Common senses of capital

In business and financial contexts, capital usually means stored wealth—money or other liquid resources—set aside to launch, operate, or expand an enterprise. In practice this includes cash, credit lines, and financial instruments that are available for investment or to meet short-term obligations.

Capital goods and production

Economists often distinguish capital goods from consumer goods. Capital goods are durable items produced by people that are used to make other goods or services rather than consumed directly. They typically have these characteristics:

• Used as inputs in the production process rather than for personal consumption.
• Manufactured or human-made, in contrast with naturally occurring resources classified as land.
• Durable or not immediately consumed—examples include machinery, tools, and buildings.

Capital as a factor of production

In classical economics and standard production theory, capital is recognised as one of the primary factors of production. The usual fourfold list names land, labor, organization (sometimes called entrepreneurship) and capital. As a factor, capital complements labor and land by increasing productive capacity.

Types and accounting views

Analysts separate capital into several useful categories. Fixed capital refers to long-lived assets such as plant and equipment. Circulating or working capital covers inventories and other items that are used up in production and replaced regularly. The classical economist David Ricardo drew a clear distinction between fixed and circulating capital, a distinction that persists in economic writing.

From a finance standpoint, capital also denotes the funds available for investment and the mix of debt and equity that finances a firm’s operations. In accounting, capital appears on the balance sheet as owners’ equity, retained earnings, or contributed capital, measures used to evaluate solvency and financial structure.