Capital Accumulation

What is Capital Accumulation?

Capital accumulation refers to the appreciation in the value of the amount invested in any kind of asset, whether it is 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 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

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Capital Accumulation Equation

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

Capital Accumulation = Value on the Date of Calculation – Amount Invested
  • 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.

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:

ParticularsAmount InvestedCurrent Value
Investment in Shares$500,000$637,000
Land Purchased$1,000,000$1,000,000
Inventories$250,000$300,000
Goodwill$112,500$200,000
Trade Marks$37,500$63,000

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

Total of the amount invested

Capital Accumulation Example 1-1

Total of the current value

Capital Accumulation Example 1-2

Capital Accumulation = Current Value – Amount Invested

Capital Accumulation Example 1-3
  • =$ 300,000.

Example #2

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:

Now,

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

Example 2
  • Amount invested = $18,500,000

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

Example 2-1
  • Current Value = $21,650,000

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

Example 2-2
  • = $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

Measures

Why Is It 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.

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