What is the difference between net assets and capital?

[lauz125]

Hello,

I have just started my AAT a couple of days ago so I'm just learning the basics (sorry if this is a stupid question).

As far as I'm aware, the two equations are as follows:

Net assets = assets - liabilities

Capital = assets - liabilities

So can anyone please tell me what the difference is between net assets and capital? I know that net assets is what the company is worth, and capital is what the company owes to the owner. But aren't these essentially the same thing in terms of balance sheets? Will the net assets always be the same as the capital on a balance sheet? I am yet to find a scenerio where they equal to different amounts, so I don't understand why both amounts should be entered onto a balance sheet?

Again, sorry if this is such a basic question but I'm only on module 2 of level 2!!

Thanks in advance

 

[bklynboy]

Actually Equity = assets - liabilities and is the same as calling it net assets. Capital is a component of equity and represents the investments conributed by shareholders to the company. Equity would also include items such as retained earnings (accumulated profits or losses), MTM on investments (unrealized amounts) and currency translation adjustments as the main items.

Net assets is also the book value of the company. Capital is not what is owed but what investors contributed.

 

[lauz125]

Thanks. I have the AAT book here and it says that capital is what is owed to the owner(s) by the business. So I'm confused now as you're saying that it is what investors contribute. I thought shares/loans are what investors contribute rather than capital?

I think I will have a word with my tutor here as there are too many words that appear to be the same thing eq equity net assets capital working capital etc.

Thanks for your input.

 

[bklynboy]

Thanks. I have the AAT book here and it says that capital is what is owed to the owner(s) by the business. So I'm confused now as you're saying that it is what investors contribute. I thought shares/loans are what investors contribute rather than capital?

I think I will have a word with my tutor here as there are too many words that appear to be the same thing eq equity net assets capital working capital etc.

Thanks for your input.

The corporation issues shares and sells these to investors to raise funds. If these were what the company owed they would be categorized as liabilities which capital is not. Capital is part of equity as it represents funds contributed for the corporation to use in running its operations and do not get repaid (there could be returns of capital but these are not contractual).

 

[lstone]

Does anyone know a lot about ratio analysis?

I'm really keen to start using these to go over some accounts for my business course. If anyone has any good sources of information for ratio analysis and a career in Accountancy I would be grateful.

Thanks for any feedback

 

[bklynboy]

Does anyone know a lot about ratio analysis?

I'm really keen to start using these to go over some accounts for my business course. If anyone has any good sources of information for ratio analysis and a career in Accountancy I would be grateful.

Thanks for any feedback

There are tons you can find by searching the internet and really depend on what type of company it is (manufacturing,servicem real estate, etc). One link that gives a good overview is below:

Investopedia.com: Financial Ratio Tutorial

 

[iNinjaNotes]

Your right about net assets. Assets - Liabilities = Net Assets.

Capital is a bit more confusing because it can be used in many different ways. It has multiple definitions.

Capital asset = An asset that you own and that can be amortized
Capital = The amount contributed by owners of the company
Capitalize = to add an expense onto a capital item and continue amortizing the capital item.

But capital is NOT equity. Equity is made up of retained earnings AND capital.

Capital is the amount contributed by shareholders or owners or the company. For instance, if I inject a car as an asset into the company, Capital would increase and Assets would increase.
If I sold more shares of my company, Capital would increase and Cash as an asset would increase.

 

[bklynboy]

Your right about net assets. Assets - Liabilities = Net Assets.

Capital is a bit more confusing because it can be used in many different ways. It has multiple definitions.

Capital asset = An asset that you own and that can be amortized
Capital = The amount contributed by owners of the company
Capitalize = to add an expense onto a capital item and continue amortizing the capital item.

But capital is NOT equity. Equity is made up of retained earnings AND capital.

Capital is the amount contributed by shareholders or owners or the company. For instance, if I inject a car as an asset into the company, Capital would increase and Assets would increase.
If I sold more shares of my company, Capital would increase and Cash as an asset would increase.

This is the same comment I already made in my first response that capital is part of equity and woudl include RE.

 

[iNinjaNotes]

This is the same comment I already made in my first response that capital is part of equity and woudl include RE.

Lol. My bad, I don't read all the comments, too time consuming, I just answer the Q. If anything it increases the validity of your answer!