Meaning and definition of Capital Employed
Generally, capital employed is presented as deducting the current liabilities from the current assets. It can be defined as equity plus loans which are subject to interest. To define it properly, capital employed can be expressed as the total amount of capital that has been utilized for acquisition of profits. It also refers to the value of all assets (fixed as well as working capital) employed in a business.
As explained by Investopedia, capital employed is a term that s used commonly, but is a little difficult to be defined for it is used in different contexts. However, all the definitions usually refer to the investment required for the functioning of a business. “Employing capital” indicates making an investment in the business.
Formula for Capital Employed
The general formula used for computing capital employed is:
Capital employed = Total Assets – Current Liabilities = Equity + Non-current Liabilities
Calculating Capital Employed
Generally, the capital employed can be calculated through two methods as mentioned below:
The first method involves calculating capital employed from the assets side and is worked out by 5the adding up the following:
I. The fixed assets are included in their net values, be it original cost or the replacement cost after depreciation. In times of inflation, it is advisable to count fixed assets at the replacement cost which is actually the current market value of the assets.
II. Investments into the business.
III. All current assets like cash in hand, sundry debtors, cash at bank, bills receivable, stock, and similar more.
IV. To determine the capital employed, current liabilities are subtracted from the total assets
As an alternative to the first method, capital employed can also be calculated from the liabilities side of a balance sheet. While calculating form the liabilities side, he following items will be included:
I. Share capital which includes issued share capital (Equity + Preference)
II. Reserves and Surplus that includes General reserve, Capital reserve, Profit & Loss account, Debentures, and other long term loans.
III. To evaluate the capital employed, the sum of liabilities mentioned above is deducted from the total assets’ worth.
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