What is the Difference Between Equity and Capital?
🆚 Go to Comparative Table 🆚Equity and capital are two important terms in the business world that have distinct meanings and implications:
- Equity represents the total amount of money a business owner or shareholder would receive if they liquidated all their assets and paid off the company's debt. It is the company's net worth, calculated as total assets minus total liabilities. Equity can also refer to the ownership interest of an individual or group in a business entity.
- Capital refers to the funds that a company has available for use. It is the amount of money invested in a company by its owners, shareholders, or investors. Capital is a subset of equity and is used to purchase assets, invest in projects, and fund operations.
Key differences between equity and capital include:
- Equity represents ownership in the company and is calculated based on the value of assets minus liabilities. Capital, on the other hand, refers to the total amount of money invested in the company by its owners, shareholders, or investors.
- Equity is the total of the capital invested by owners plus profit, while capital is a subset of equity.
- The cost of equity, which refers to the percentage return demanded by a company's owners, is a component of the cost of capital, which includes the rate of return demanded by both lenders and owners. The cost of equity tends to be higher than the cost of debt because equity investors are rewarded more generously than debtholders.
In summary, equity represents the ownership interest and net worth of a company, while capital refers to the funds available for use in the company. These terms are related but distinct, and understanding the difference between them is crucial for making informed business decisions.
Comparative Table: Equity vs Capital
Here is a table highlighting the differences between equity and capital:
| Feature | Equity | Capital |
|---|---|---|
| Definition | Equity represents the net worth of a company, which is calculated as Total Assets minus Total Liabilities. | Capital refers to the amount of funds available for a company to purchase required assets for its operations. |
| Components | Equity consists of the capital invested by owners, retained earnings, and any other sources of financing. | Capital is a subset of equity and includes other assets such as treasury shares and property. |
| Relationship | Equity is the total value of the company, which includes capital. | Capital is a part of the company's equity, representing the funds contributed by owners. |
| Financial Documentation | Equity is represented on a company's balance sheet, along with total assets and total liabilities. | Capital can be found in a capitalization table, which displays the equity ownership capitalization for a company, including common equity shares, preferred equity shares, warrants, and convertible equity. |
In summary, equity represents the net worth of a company and includes capital, which refers to the funds available for purchasing required assets.
Read more:
- Cost of Capital vs Cost of Equity
- Debt vs Equity
- Equity vs Assets
- Capital vs Asset
- Equity vs Debt Financing
- Equity vs Shares
- Equity vs Equality
- Liability vs Equity
- Equity vs Debt Securities
- Equity vs Security
- Derivatives vs Equity
- Cost of Equity vs Cost of Debt
- Commodity vs Equity
- Common Law vs Equity
- Capital Market vs Stock Market
- Money Market vs Capital Market
- Fixed Capital vs Working Capital
- Capital vs Capitol
- Capital Reserve vs Reserve Capital