Glossary · Also called Owner's equity
Capital
The money and resources the owner has put into the business, plus profits kept in it, less anything taken out.
What it means
The owner's claim on the assets of the business: assets less liabilities; also called owner's equity.
Example
If the owner pays RM20,000 into a new business, capital is RM20,000.
Why it matters
Capital completes the accounting equation. Profit increases capital; drawings reduce it.
In practice
Capital is a credit balance. It shows the owner's claim on the business and sits near the top of the financing section of the statement of financial position. It is opening capital, plus any new money the owner adds, plus profit for the year, less drawings and any loss.
For example, the owner starts with RM20,000, the business earns RM5,000 profit and the owner withdraws RM3,000. Closing capital is RM22,000.
Under the entity concept, the business owes capital back to the owner, which is why it carries a credit balance like a liability. Both are claims on the assets, but they differ. Capital is the owner's claim and ranks last. Liabilities are claims from lenders and suppliers, and they must be settled first.
Drawings reduce capital directly. They are never an expense in the income statement. If capital and drawings keep tripping you up, one of our teachers can walk you through a full capital calculation step by step. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 1.2 The accounting equation (page 11).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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