Future Business Leaders of America (FBLA) Accounting Practice Test

Which of the following best describes "Capital" in accounting?

1. Liabilities of the business

2. Investments made by the owner

3. Income generated from sales

4. Expenses incurred by the business

The correct answer is: Investments made by the owner

Capital in accounting refers to the financial resources or assets that are provided by the owners or invested in the business for its operation and growth. This investment represents the owner's claim on the assets of the business, and it contributes to the overall equity of the company. It can include the initial funds provided to start the business, ongoing contributions, and retained earnings which are profits reinvested in the business. When considering the other options, liabilities represent the obligations or debts that a business owes to outside parties, which is the opposite of capital. Income generated from sales pertains to revenue, not capital itself, as it reflects earnings rather than the initial investment. Expenses incurred by the business involve costs that are essential for operations but reduce the profits and, consequently, affect the owner's equity rather than constituting capital. Thus, the correct answer emphasizing the owner's contributions to the business aligns perfectly with the definition of capital in accounting.