Is Equity and Capital the Same?

by Sindhu
(Klang, Selangor, Malaysia)

Is equity and capital the same? Q: Is equity and capital the same ?


A:
No, they are not.

Equity (or owner's equity) is the owner's share of the assets of a business (assets can be owned by the owner or owed to external parties - debts).

Capital is the owner's investment of assets in a business.

The owner can also make profits from a business that he/she runs. These profits belong to the owner (they do not belong to anyone else, right?). Therefore, profits from a business are also part of equity.

Profits are kept in accounts called reserves.

Therefore equity consists of capital plus reserves (accumulated profits).

Capital is one sub-category of equity, reserves (accumulated profits) are another.

Hope that helps clarify the difference between equity and capital.

- Michael Celender
Founder of Accounting Basics for Students

Comments for Is Equity and Capital the Same?

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Basic Accounting Equation Formula Question
by: Laxman

In one exam the examiner asked what is the correct accounting equation.

They gave the following options:

1) ASSETS = LIABILITIES + EQUITY
2) ASSETS = LIABILITIES + CAPITAL

Which is the correct answer? I have much confusion, kindly clarify this.

Hi there, the correct answer is number 1.

As you can see from my explanation above, owner's equity and capital is not the exact same thing.

Capital is actually a subcategory of owner's equity.

The overall accounting equation is:

ASSETS = OWNER'S EQUITY + LIABILITIES

See the following lessons for more in-depth explanations:

- The Basic Accounting Equation or Formula
- What is Owner's Equity?
- The Accounting Equation and Financial Position

Also, try The Basic Accounting Test, where you can test yourself on the basic accounting equation and its three elements.

Good luck!

Michael Celender

Grateful
by: Anonymous

Thank you so much. It's a such a clear and simplified explanation.

Perfect explanation!!
by: Anonymous

Well worded, great explanation! This helped SO MUCH

You're very welcome!

Regards,
Michael Celender
Founder of accounting-basics-for-students.com

Helped me understand more
by: Anonymous

Though this did give me a better understanding of equity it did not give me a clear enough understanding of Capital.

Excellent!
by: Anonymous

LOL! I teach this subject and you have explained this area better than I ever had. Good Job.

Wow, thanks so much for your kind words.

Best,
Michael Celender

Thxxx
by: Sajed khan

Good job sir. Really good info, thanks.

Khaalid
by: Anonymous

I understood although it was somehow difficult to classify their real meaning.

Good answer
by: Anonymous

Simple and clear - well written!

Thanks

great
by: Anonymous

Thanks! Your answer was really helpful.

regards
by: mustafa

yaah this is great information that i needed.

thank you very much for your kind and honest information . wish you proceed like this.

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