Interpretation of Accounts Using Simple Accounting Ratios Equity: Capital Employed - SS2 Accounting Lesson Note

Capital employed is a financial term that refers to the amount of money invested in a business by its owners and/or lenders. It includes all the long-term and short-term funds that are used to run the business, such as equity, loans, and retained earnings.

To calculate the capital employed of a business, you add up all the assets that the business owns, including property, equipment, and inventory, and then subtract all the liabilities, such as loans and accounts payable. The result is the amount of capital that is currently being used to generate income for the business.

Capital employed is important because it helps to measure the efficiency and profitability of a business. If a business has a high capital employed, it means that it has a large amount of assets and liabilities, and therefore may be riskier. However, if a business is using its capital efficiently, it can generate higher profits and returns for its owners and investors.

Ultimately, the goal of any business is to maximize its return on capital employed, which means generating as much profit as possible from the amount of capital invested in the business. By carefully managing their capital employed, businesses can ensure they are making the most of their resources and making informed decisions about investments, expansions, and other financial decisions.