The term Capital appears in quite a few different terms, with different meanings in business finance, investing, budgeting—and the field of Economics. However, all of these meanings have in common a reference to substantial resources for producing goods and services.
Economists, for instance, often use the term Capital Stock, as do Accountants. In both cases, Capital Stock refers to costly resources that earn income. Economists, however, use the term to explain the source of economic output for nations. Accountants use the term Capital Stock to explain how companies in private industry generate earnings.
Explaining Capital Stock in Context
Sections below further explain the capital stock concept, in context with similar terms from the fields of economics, accounting, and finance.
In economics, the term capital stock is approximately interchangeable with the terms capital goods, real capital, or capital assets. By any of these names, capital stock items are already-produced, durable goods or any nonfinancial asset that works for the production of goods or services.
"Capital" entered English usage in the mid-sixteenth century, from origins in Latin Languages:
The first known use of the word capital is in early Middle English, in which it was used as an adjective meaning "of or relating to the head." It derives from the Latin adjective capitalis, of the same meaning, coming from the Latin name for "head," caput. The word originally indicated something affecting the head, as in "a capital bruise" or "a capital wound."
Injuries to the head can be serious and even fatal; by extension, capital came to describe people or things threatening the loss of life ...
Adam Smith's Wealth of Nations2 (1776) receives credit for imparting an economic meaning to "capital." By Smith's definition, capital is stock, while profit refers to realizing the revenue from improvements made to that stock. Smith also viewed capital improvement the preferred objective for the economic and system. Note, however, that Smith called his ideal economic system "natural liberty," although others later named it "Capitalism."
For more on the meaning of capital stock in economics, see the articles
When referring to company ownership, the term capital stock is just another name for corporate share ownership. When used in this sense, common stock includes all classes of common and preferred shares.
- Accountants total the firm's company's capital stock as the sum of the firm's common and preferred shares, values equaling their selling prices at their initial public offering.
- The Total capital stock value appears on the firm's Balance sheet under Owners Equity as Paid in Capital., as Exhibit 1 (below) shows.
For more on the meaning of capital stock in accounting, see the articles:
The Balance Sheet summarizes the value of the firm's Assets, Liabilities, and Equities at one point in time. Companies normally publish the Balance Sheet and other financial statements just after the close of a financial quarter or year.
In Exhibit 1, below, Grand Corporation reports capital stock value (Contributed Capital ) on December 31, 20YY, as $9,439,000.
The Contributed Capital entry appears in the third of the Balance Sheet's three main sections, Owners equity. Note also that regardless of whether the company is in excellent financial health or poor health, principles of double-entry bookkeeping and accrual accounting ensure that the Balance sheet always balances. "Balance" means that the following equation always holds:
Total Assets = Total Liabilities + Total Owners Equities
The Owners Equities Section appears near the bottom of Exhibit 1. There, Capital Stock (Contributed Capital) includes three components:
- Preferred Stock: $3,798,000
- Common Stock: $4,184,000
- Contributed capital in Excess of Par: $1,457,000
These values together make up Grande Corporation's total capital stock, $9,439,000.
- Merriam-Webster, "9 Financial Words With Surprising Origins."
- Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan.