CAPITAL 337 CAPITAL is measured in terms of its value, it is sometimes called capital value. One of the best methods of understand- ing the nature of capital is to under- stand the method of keeping capital ac- counts. A capital account or balance sheet is a statement of the quantity and value of the wealth of a specific owner at any instant of time. It consists of two col- umns — the assets and the liabilities — the positive and negative items of his capital. The liabilities of an owner are his debts and obligations to others; that is, they are the property rights of others for which this owner is responsible. The assets or resources of the owner include all his capital, irrespective of his lia- bilities. These assets include both the capital which makes good the liabilities, and that, if any, in excess of the lia- bilities. The owner may be either a physical human being or an abstract entity called a "fictitious person" made up of a col- lection of human beings and keeping a balance sheet distinct from those of the individuals composing it. Examples of fictitious persons are an association, a partnership, a joint stock company, a government. With respect to a debt or liability, the person who owes it is the debtor, and the person owed is the cred- itor. The difference in value between the total assets and the total liabilities in any capital account is called the net capital, or capital balance of the person or company whose account it is. A fictitious person is to be regarded as owning all the capital nominally in- trusted to it and as owing its individual members for their respective shares; consequently there is no net capital bal- ance belonging to the fictitious person, although in most cases there is a lia- bility item called capital which repre- sents what is owed to those most respon- sible for the management of the busi- ness. The most important example of a fictitious person is a joint stock com- pany. Associated with the stockholders are usually also bondholders without vot- ing power, but with the right to receive fixed payments stipulated in the bonds which they hold. The "capital" item in the capital account of a joint stock com- pany is a liability due to the stockhold- ers. It represents what is left after the value of all other liabilities is deducted from the value of the assets. The items in a capital account are constantly changing, as also their val- ues; so that, after one statement of as- sets and liabilities is drawn up, and an- other is constructed at a later time, the balancing item, or net capital, may have changed considerably. However, book- keepers are accustomed to keep this re- corded "capital" or "capital balance" item unchanged from the beginning of their account, and to characterize any increase of it as "surplus" or "undivided profits" rather than as capital. The bookkeeper systematically under- values the assets of the company and even omits some valuable assets alto- gether, such as "good will". The object of a conservative business man in keep- ing his books is not to obtain mathemati- cal accuracy, but to make so conservative a valuation as to be well within the re- quirements of the law and expediency. There are two valuations of the capi- tal of a company, the bookkeeper's and the market's. The latter, being more frequently revised, is apt to be the truer of the two, although it must be remem- bered that each of them is merely an appraisement. Insolvency is the condition in which the assets fall short of the liabilities other than capital. The capital balance is intended to prevent this very calam- ity; it is for the express purpose of guaranteeing the value of the other lia- bilities — ^those to bondholders and other creditors. These other liabilities, for the most part, are fixed blocks of property, carved, as it were, out of assets, the value of which property the merchant or company has agreed to keep intact at all hazards. The fortunes of business will naturally cause the whole volume of assets to vary in value, but all the "slack" ought properly to be taken up or given out by the capital, the surplus, and the undivided profits. A man's capi- tal thus acts as a safety fund or buffer to keep the liabilities from overtaking the assets. It is the "margin" he puts up as a guarantee to others who intrust their capital to him. The assets may comfortably exceed the liabilities, and yet the cash assets at a particular moment may be less than the cash liabilities due at that moment. This condition is not ti'ue insolvency, but only insufficiency of cash. In such a case, a little forbearance on the part of creditors may be all that is necessary to prevent financial shipwreck. A wise merchant, however, will not only avoid insolvency, but also insuf- ficiency of cash. He will not only keep his assets in excess of his liabilities by a safe margin, but he will also see that his assets are invested in such a manner that he shall be able, by exchanging them for cash, to cancel each claim at the time and in the manner agreed upon. There are three chief forms of assets ; namely, cash assets, quick assets, and slow assets. A large part of the skill
