What is capital?
The capital of a company relates to the total value of assets. This includes assets such as machinery, inventory, equipment, and liquid assets. Within the category of a company’s capital, different types of capital can be distinguished. This includes, among others, equity and debt capital. Debt capital can further be divided into short-term debt and long-term debt.
What is equity?
A company’s equity consists of assets minus liabilities, or the calculation performed by subtracting debts from assets. The meaning of equity thus follows the formula: equity = assets – liabilities. The assets are on the left side of the balance sheet and the liabilities on the right side of the balance sheet. Want to know more about assets and liabilities? Read here what assets and liabilities exactly are.
Equity can increase if your company makes a profit or if there is a private contribution or capital addition. Equity decreases in the event of a loss, distribution of profit or dividend, depreciation of business assets, and in the case of a private withdrawal or return of capital.
What is debt capital?
A company’s debt capital consists of financial obligations, such as debts in the form of a business loan (Debt capital = debts – equity). This type of capital is therefore listed on the credit side of the balance sheet under liabilities. There is a distinction between short-term debt and long-term debt in debt capital.
What is short-term debt?
Short-term debt refers to debts that need to be settled in the relatively short term. This includes creditors to whom you still need to pay an invoice or a trade debt that is still outstanding with a supplier. A short-term loan also falls under short-term debt.
What is long-term debt?
Long-term debt involves a debt that has been incurred for the long term. A mortgage for a business property is an example, as are lease debts and bond loans. One of the characteristics of long-term debt is that it usually involves interest, which is often not the case with short-term debt, except for a short-term loan taken out with a bank.
