WHAT IS CAPITAL?WHY WE NEED IT.

Capital – What is Capital?

Under double-entry accounting, capital is the liability of a company’s balance sheet. (basic definition of the term) Basically, a distinction is made here between equity and debt capital. From a technical point of view, therefore, this portrays the sources of finance for the various assets of the company on the assets side of the balance sheet.

 

The capital base of each company: the equity

Equity includes all valuable assets that the owner of a company contributes to the company itself. Above all, this includes the self-imposed financial resources. In addition, in the balance sheet, however, surpluses and reserves included in the balance sheet also accounted for part of the capital of a company. The same applies to things brought into the company. If, for example, the premises and the buildings on them are owned by the book-keeping company, they are part of the liabilities of this company. The same applies to vehicles for which the company is registered as owner. Even machines that are not leased, but purchased, can be found on the liabilities side again. In this context, it is important to understand the performance of liabilities in the balance sheet in order to obtain a correct presentation of the financial situation of the company.

Debt and financial planning

Liabilities are assets that are made available to the company by third parties. The classic case in this context is a bank loan. However, this also includes political support programs in the context of subsidies and other forms of foreign sources of money. In order to obtain debt, an equity ratio of at least 20 percent is usually required. A company’s capital plays a central role in its financial planning as it serves to finance the business. The capital requirements planning should always be holistic and should focus on short-term as well as medium and long-term developments. The most important aspect here is the guarantee of the company’s long-term solvency in the context of liquidity planning.

Equity – What is equity?

Equity in the financial industry refers to the amount of capital available for financing without the need for borrowing. Especially in the construction of homes and start-ups, the existing capital is an important pillar of financing.

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Equity in the construction or purchase of real estate

If the construction or purchase of a property is planned, financing should be planned on a sound basis. As a rule, the financing of a larger project consists of several pillars. In addition to Bauspar contracts, promotional loans and a bank loan, it is important that a certain percentage of financing capital already exists. This own capital reduces the financing sum. As a consequence, there is an interest savings that can be quite substantial over the years of financing. Another advantage is that part of the property is already in the possession of the buyer. This is very important in the case of resale or payment difficulties that may arise due to unforeseen events during the financing period.
What should be the equity in the construction or purchase of a house, is not well defined. There are no regulations in this regard. Theoretically, a house can also be built without own capital. However, the risk is high, especially in the first years. For this reason, financial experts advise to bring at least 30 percent of their own capital into the financing. This does not have to be cash. Own work in house construction or renovation can also reduce the burden of financing.

Debt – what is debt?

Borrowed capital is capital that is lent to a company by third parties – the so-called creditors – for a limited and repayable period. Borrowed capital is made available to companies (see also the lexicon entry for corporate governance) in various forms that have one thing in common: There is neither an owner position nor a real entrepreneurial co-decision with this capital. Instead, the “capital of strangers” is made available with the intention that the repayment of interest and capital exceeds the original payment to the company.

 

Differences between equity and debt

In addition to debt capital, a company also based on its equity. Both capital sources can be distinguished on the basis of their legal position and the associated characteristics:

Capital provided by the owners – ie natural or legal persons – equity
Capital that third parties provide to the company → Debt
borrowing

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