What is Capital Accumulation?

Capital accumulation refers to the appreciation in the value of the amount invested in any asset, whether tangible or intangible; in other words, it is the positive difference between the invested value and the value on the date of calculation. For example, suppose we have invested an amount of $100,000 in some shares, and on the date of calculation, the value of such shares is $150,000. The amount of capital accumulation is $50,000, which is the difference between the amount invested and the amount on the date of calculation.

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Capital Accumulation Equation

The capital accumulation equation is defined as the difference between the invested amount and the value on the date of calculation. Mathematically, it is represented as:

  • Determine the amount to be invested.Determine the type of assetThe Type Of AssetAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more in which the determined amount is to be invested.Invest such amount in the decided assets.Check the value of such assets on the date of calculation.Finally, take the difference of amount calculated in step 4 and step 3 to be called capital accumulation.

Examples

Example #1

Suppose ABC Inc. has the following investments and their values as on the date of calculation of capital accumulation, which is as follows:

Now, in the above example, we have to calculate capital accumulation, which is as follows:

Total of the amount invested

Total of the current value

Capital Accumulation = Current Value – Amount Invested

  • =$ 300,000.

Example #2

Mr. A has invested a sum of $1,500,000 and purchased 1500 shares of Reliance Industries Ltd at a rate of $1000 per share in April 2019 and had also purchased land amounting to $17,000,000. The current value per share of Reliance Industries Limited is $1100 per share at the end of the year, and $20,000,000 is the value of the land. Now Mr. A wants to calculate the capital accumulation on the investment made, which is as follows:

Now,

= (1500 shares * $1000 per share) plus $17,000,000

  • Amount invested = $18,500,000

= (1500 shares * $1100 per share) plus $20,000,000

  • Current Value = $21,650,000

= $(21,650,000-18,500,000)

  • = $3,150,000

Mr. A has earned $3,150,000 on the investments made in shares of Reliance industries ltd, which gives a return of approximately 17% p.a. within a year during the period of investments, which is computed as (3,150,000/18,500,000 * 100 * 1 year ).

Rules

  • This concept is applicable where the investments were made from the long-term perspective.Where the entity is a listed entity, then in that situation, it is required to calculate its capital accumulation quarterly, i.e., after the completion of every third month.The financial statements of the entityFinancial Statements Of The EntityFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more are required to be shown at true values, i.e., after considering the appreciations and actual values of the investments made or in the value of assets acquired or already in possession of.

Measures

  • Change in the value of investments made in any tangible or intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more.Amount earned from business operations and reinvested to earn capital appreciationsCapital AppreciationsCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more or short term profits.The effect on the value of the company’s share if traded because of good decision-making and growth perspective also increases the capital share of an enterprise.

Why Is It Important?

  • Every business has to invest their business funds so that they can return the maximized return to the business.As the hard-earned money of shareholders and lenders is involved along with their interest in the long-term growth of the business, it gives more importance to timely analyzing the position of funds and redeeming or investing as and when required after analyzing the results thereof.This also acts as an additional source of generating returns on the activities of the companies by way of capital appreciation.Sometimes, the wrong decisions taken by the management will lead to a long-term impact on the working and results of the entity. It also leads to the break of trust for various types of stakeholders and lenders.

This has been a guide to What capital accumulation is & its Definition. Here we discuss the equation to calculate capital accumulation and why it is important, along with rules and measures. You can learn more about it from the following articles –

  • Formula for Capital Loss CarryoverFormula of Capital EmployedCapital ImprovementInvested CapitalEndowment Fund