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Definition of Capital

  • 7 posts
  • # 70124

As I understand it, capital is the value of the owners investment.
Therefore, if an owner puts a van into the business worth £2000 for example, the company owes the owner £2000.
The fact that the van depreciates over time shouldnt change the fact that the company still owes the owner £2000, or should it?

For example, if I borrowed £2000 from a bank, and did not make any repayments for a yr, I would still owe the bank £2000, even if inflation rose and the value of the money depreciates. Id still owe £2000

The owners investment would be nil in four yrs when the van has depreciated to scrap value.  This loss of investment seems like a dis-incentive to invest.

The owner may get payoffs elsewhere via company profit, but may not.  Could someone explain this to me,  Is it just a case of risk / reward, or am I missing something?
Thank you

  • Fellow PM.Dip
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  • 256 posts
  • # 70126

Hi Jimpelican,

If the owner put a van into the company that was worth £2,000, even if the van is fully depreciated after, say, 2 years, the company would still owe the £2,000 back to the owner. The depreciation charge only shows the reduction in the useful economic life of the asset and has nothing to do with capital. You cannot in effect depreciate capital. 

I hope this makes sense?

  • 7 posts
  • # 70127

Thank you very much for that LadyM.  Sometimes I read myself into a fog, and get to a point where nothing makes sense to me.  I begin to over analyse, which in turn leads me to question everything.

My confusion stemmed from the fact that when you prepare the balance sheet, the net book value is used, and the capital will balance based on the net book value figure, not the total capital invested.
 
Its nice to get a 'pat on the back', and a reassuring 'calm down this is what your looking for' answer for which i am very grateful.
thank you

Edited at 08 Apr 2011 01:40 PM GMT

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