WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Accounting Tutorials » Accounting Fundamentals » Capital Account

Capital Account

By Madhuri ThakurMadhuri Thakur | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

Capital Account Definition

The capital account in accounting refers to the general ledger that records the transactions related to owners funds i.e. their contributions as well as earnings earned by the business till date after reduction of any distributions such as dividends. It is reported in the balance sheet under the equity side as “shareholders’ equity” in the case of a company. For a sole proprietorship, it is represented as “owner’s equity”.

Explanation

  • For a sole proprietorship, the amount in this account would consist of the proprietor’s contributions net of any amounts withdrawn, i.e. drawings and accumulated profits to date.
  • Similarly, for a partnership firm, this account would include the outstanding balances of capital contributions of the partners after accounting for drawings made by them and profit distributions done to them in accordance with the profit-sharing ratio. While drawings would reduce the capital balance, the profit appropriation to partners would increase their capital accounts.
  • Talking about the company, it includes share capital (both equity and preference capital), additional paid-in capital, retained earnings as well as any equity reserve.

Formula

The formula for a capital account can easily be derived using the accounting equation. Let us first have a look at the accounting equation.

Assets = Liabilities + Capital

As we can see, the amount of assets in any business at any point in time is the sum of its liabilities and capital. Thus, if we want to calculate the amount in the capital account, we need to use the below formula:

Capital = Assets – Liabilities

We can derive the amount of capital by reducing the number of liabilities from the number of assets reflecting on the balance sheet of any business.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Examples of Capital Account

You can download this Capital Account Excel Template here – Capital Account Excel Template

Let us have a look at the extracts of the balance sheet of a company, ABC Ltd. We will try to understand how the capital account of a company looks like:

Capital account Example

As seen in the above balance sheet extracts, this account of a company is reflected as “Equity” in the balance sheet. The total equity includes different components of equity, such as share capital, share premium, retained earnings, and so on.

Components of Capital Accounts

Capital_Account_1

  1. Stock Capital: This includes the amount of equity and preference stock. It represents the amount invested by the stockholders against which they have been issued units of stocks.
  2. Additional Paid-in Capital: It represents the amount received from the stockholders in excess of face value. It is also known as “stock premium”.
  3. Other Capital Contributions: For sole proprietors and partnership firms, they would include the owners’ capital account, i.e. the capital balance of the sole proprietor and the partners, respectively.
  4. Retained Earnings: This represents the accumulated profits of a business on a particular date. Also, any reserves created out of such accumulated profits shall also be taken into account.

Importance

  • The capital account becomes an essential part of the financial statements of any business because it represents the amount that remains invested in the business by the owners on a particular day.
  • We can use this amount to identify how much of assets have been financed with capital, i.e. owners and how much portion is debt-financed.
  • This account can be used to calculate different financial ratios such as debt-equity ratio, and so on.
  • It helps the banks and other financial institutions to decide whether to grant further loans to such a business or not.

Limitations

  • This account alone is not decisive for reaching any conclusion; if investors want to analyse the financial position of a business, they need to look at the entire balance sheet.
  • The calculation can vary slightly from one business form to another.

Recommended Articles

This article has been a guide to what is a Capital Account in accounting and its definition. Here we discuss its examples, components, and importance. You may learn more about accounting from the following articles –

  • Partnership Capital Account
  • Current Account vs Capital Account
  • Is Retained Earning an Asset?
  • Appropriated Retained Earnings
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Download Capital Account Excel Template

Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More