Total capital is the amount of cash and funds that an investor has in his/her investment portfolio. It is the total money an investor has invested and does not yet need to cash out (such as waiting for dividends to become payable). When talking about investment capital, one definition of it is, “the total value of all assets less any liabilities and owned at the close of business.” A different definition of this is, “net worth,” which means, “the value of an entity’s net worth at the end of a period.”
It helps to understand the difference between the two definitions. The total capital column represents the net worth of a business at the end of any one period of time. On the other hand, the net worth column represents net worth minus what is owed to the business. An owner of a business may owe money to a third party immediately after purchasing the business, but would have a total capital account that did not include any debt obligation to the third party. Net worth is net worth – the entire value of the business at the close of the period of time during which it held the ownership stake.
The total capital account can be very complex since it includes the value of a business while it exists as well as its value while it is no longer in operation. The value of the business while it exists represents the investment value of the business while it is live and the value of the business while it is no longer live represents the value of the business as if it were no longer in operation. Any gap in between the two accounts cannot be allocated to the current value of the business.
There are two types of capital that are used in investments: long-term and short-term. Long-term capital is invested to create a source of steady income from a business that will continue to earn money for many years to come. Short-term investments are usually made to create a source of immediate income from the start of the business until it is sold or the end of the lease. The two types of capital will be classified according to whether they are used to make purchases of property, raw materials, equipment, supplies and labor or whether they are used to make payments on loans. A combination of both capital types is called varied capital.
The total capital account shows the total value of all assets – cash, equities, stocks, preferred stock, property and personal, intangible assets. However, these categories of assets do not include the value of liabilities because they are classified according to their liabilities as well as their assets. These liabilities are generally considered as current assets.
One question that often arises when one is looking at the total capital account is what is the total debt. Total debt is the total amount of all debts of a business that is recorded in the books of the company and is not controlled by the owners of the business at that moment. When a business creates new debts it is creating new capital. So, the total debt account will show the total debt of the business at any point in time.
Another thing that needs to be understood is what is the net worth of a company. Net Worth is the value of a business less the value of its net assets – including goodwill and fixed assets. These assets are all considered to be net worth. When we add net worth to net capital, the result is what is referred to as net worth equity.
All of these terms are part of what is total capital accounting. There are many books written on this subject matter. A quick Internet search can produce books and reports that will explain all of the technical terms. You can also find some online seminars and webinars on this topic that will give you a better understanding of this important aspect of business.