Also known as Equity, Shareholders’ Equity, paid in capital. Capital represent the investment in business by the owner or owners (more than one owner as in partnership and corporate business) to run the business and earn return on it. Capital may show the total book value of assets an entity owns (if the company is not financing assets from liabilities) in other words the business can finance or purchase asset either from capital or liabilities. The use of liabilities to finance assets is called financial leverage

The phrase investment in business shows the investment in assets or finance of assets. Since asset can be financed either by capital (owner use his funds) or liabilities (owner borrow funds), the accounting equation remains balance

Assets = Liabilities + capital

Capital can be provided by a single owner or group of owners as in the case of companies and partnership business.

Tax is chargeable on the return on capital or profit 
  • In the case of sole proprietorship and partnership business tax is chargeable on owners’ personal income 
  • In the case of companies, there is double tax deduction one from company's income and other is from dividends of shareholders 

Formula for calculating the return on capital 

                                     Net income
Return on Capital   =   --------------------

ROE or Return on Equity is sometimes called return on Net worth

Related terms 

Working Capital
The value of Current assets (cash, debtor, inventories etc.) which is reported in balance sheet

Net working Capital
The difference between the values of Current assets and Current liabilities (notes payable, account payable, bills payable etc.)

Net working Capital = Current assets - Current liabilities