Which of the following best describes capital in accounting?

• A. The total amount of cash held by a business at any given time.
• B. The sum of all revenues earned during an accounting period.
• C. The total value of all assets owned by a business.
• D. The owner's investment in the business, representing the residual interest in the assets after deducting liabilities.

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'capital' in accounting: Capital refers to the owner's equity or investment in the business. It represents the residual interest in the assets of the business after deducting liabilities.
2. Clarify why the other options are incorrect: The total amount of cash held by a business is not capital; it is a part of the assets. Similarly, the sum of all revenues earned during an accounting period refers to income, not capital. The total value of all assets owned by a business is the asset value, not capital.
3. Focus on the correct definition: Capital is the owner's investment in the business, which is calculated as Assets - Liabilities. This is the equity portion of the accounting equation.
4. Relate the concept to the accounting equation: The accounting equation is Assets = Liabilities + Equity. Capital (or equity) is the portion of the equation that remains after liabilities are subtracted from assets.
5. Summarize the importance of capital: Capital is a key component in understanding the financial position of a business, as it reflects the owner's stake and the net worth of the business.