Which of the following best describes capital in the context of equity?

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BlackTom AI · Accepted Answer

To begin, let’s parse the question: it asks which option best describes capital in the context of equity.
Option a: 'Payments made in advance for services to be received.' This is better described as a prepaid asset, not capital. It represents a future economic benefit tied to services to be received, but it doesn’t reflect owner investment or equity.
Option b: 'Funds contributed by the owners or shareholders to start and grow the business.' This statement correctly identifies capital as funds supplied by owners, which increases equity on the balance sheet and represents the owners’ investment in the firm.
Option c: 'Obligations the company must pay in the future.' These are liabilities or payables, not capital or equity, since they represent obligations to others rather than owner interest in the firm.
Option d: 'Resources owned by the company that provide future economic benefits.' While this describes assets, capital in the equity sense specifically refers to the owners’ stake, not merely the resources owned by the company. Assets are financed by a mix of liabilities and equity, but capital as a term in equity denotes owner funding, not the asset itself.
In summary, option b correctly aligns with the concept of capital as the owners’ contributions that form part of the company’s equity, whereas the other options describe prepaid items, liabilities, or general assets rather than the equity contribution from owners.

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Which of the following best describes capital in the context of equity?

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