Capital AccumulationDefined with Examples & More

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: August 4, 2022
Date Published: August 4, 2022

What Is Capital Accumulation?

Capital Accumulation is the amount earned in addition to the returned amount of the capital invested.

The lifeblood of a capitalist economy is the returns on investments which differs from the return of capital which only focuses on paying off the total amount invested.

Growth in wealth through capital accumulation can be achieved through rent, appreciation, interest, and capital gains. 

Understanding Capital Accumulation

Capital Accumulation focuses on wealth maximization through active income (income earned from business operations) and passive income (investments, interest earned, savings, etc.).

One common practice to increase production output is to purchase specific equipment that could help quickly produce high-quality products.

For human capital accumulation, investing in research and development could greatly benefit the company to also drive the production process. 

Investment in equity securities and other related investments that can help accumulate an investor’s wealth can be a form of capital accumulation should they increase in value.

When the value of fixed assets increase over time, it is considered a capital accumulation because of its appreciation. 

Capital accumulation can be achieved even without incurring additional costs or any form of monetary payments.

A well-planned business strategy and proper segregation of duties can make business operations efficient and effective.

These strategies could lead to a better production process and will therefore lead to more profits. 

capital accumulation

Measuring Capital Accumulation

For capital accumulation measurement, the change in asset value needs to be considered.

For corporate enterprises, there are many ways to utilize profit to generate more earnings.

Examples are the purchase of physical assets that can be categorized as a cash-generating unit and will provide more benefit for the company in the future, or additional human resource capital such as giving more effort to research and development of the product.

To further identify the financial status and capital structure of a company, the report you would want to look into is the financial statement report that signifies the viability of the company. 

The Income Statement report provides the presentation of the day-to-day income and expenses related to business operation.

The Cashflow statement is divided into three categories: Operating activities, Investing activities, and Financing activities.

In a normal financial cash flow setting, the cash flows resulting from operating activities must be a positive amount, while the investing and financing cash flow amounts are negative.

When the net cash flow is a negative amount, it does not necessarily mean that the company has been operating poorly, but instead, it can simply mean that the company is focused on the sustainability aspect of the business for its long-term growth.

This is mainly because the benefits brought by capital accumulation are greater than additional expenses implied by depreciation.

Capital Accumulation and Inequality

The argument about capital accumulation is that only those who have a lot to invest, or entrepreneurs who have the means to continually reinvest their wealth are the only ones who will be able to accumulate wealth which causes inequality in one country because they get to control the some aspects of the economy or a society.

This is a theory of Karl Marx, which studied the effect of capitalism on an economy, called Marxist Theory.

But others argue about the collective increase in wealth will positively affect the whole economy – for every income earned from investment and business operations, the profit earned and then re-invested will continue to circulate and may cause a continuous redistribution of wealth in an economy.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

  1. Sacramento State "ECONOMIC GROWTH AND CAPITAL ACCUMULATION " Page 1 - 28. August 4, 2022

  2. Stanford University "Capital Accumulation and Income Distribution" Book. August 4, 2022