What is Capital Accumulation?
Capital accumulation refers to the appreciation in the value of amount invested in any kind of asset, whether it is tangible or intangible; in other words, it is the positive difference of the invested value and the value on the date of calculation. For example, suppose if 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 then the amount of capital accumulation is $50,000 which is the difference of amount invested and the amount on the date of calculation.
Capital Accumulation Equation
Capital accumulation equation is defined as the difference of invested amount and the value on the date of calculation. Mathematically, it is represented as:
- Determine the amount to be invested.
- Determine the type of asset in which the determined amount is to be invested.
- Invest such amount in the decided assets.
- Check the value of such assets on the date of calculation.
- Finally, take the difference of amount calculated in step 4 and step 3 to be called capital accumulation.
Suppose ABC Inc. has the following investments and their values as on the date of calculation of capital accumulation which is as follows:
Now, in the above example we have to calculate the capital accumulation which is as follows:
Total of the amount invested
Total of the current value
Capital Accumulation = Current Value – Amount Invested
- =$ 300,000.
Mr. A has invested a sum of $1,500,000 and had 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:
= (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
- = $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 ).
- This concept is applicable where the investments were made for the long term perspective.
- Where the entity is listed entity then in that situation the entity is required to calculate its capital accumulation on a quarterly basis i.e. after the completion of every third month.
- The financial statements of the entity 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.
- Change in the value of investments made in any tangible or intangible assets.
- Amount earned from business operations and reinvested for the sake of earning capital appreciations or short term profits.
- The effect on the value of the share of the company if traded because of good decision making and growth perspective also the capital share of an enterprise increases.
Why It is Important?
- Every business has to invest their business funds in such a manner 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-run growth of the business gives more importance to timely analyze the position of funds and redeem or invest 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 appreciations.
- 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 the trust for various types of stakeholders and lenders.
This has been a guide to What is Capital Accumulation & its Definition. Here we discuss the equation to calculate the capital accumulation and why it is important along with rules and measures. You can learn more about from the following articles –