Introduction to Capital Account

Introduction to Capital Account

The capital account of a company indicates the amount the company owes to its stakeholders. In accounting and bookkeeping, the capital account is one of the ledger accounts (Also see Capital Budgeting in Business Investments). One can use it to document the sum that the investors have paid to the company, the company’s profit throughout the financial year, as well as the retained earnings the company has brought forward minus the accumulated distribution to its investors. Keep in mind that in the balance sheet, you need to record all the balances of this type of account in the section of the owner’s equity, partner’s equity or the shareholders’ equity.  

Based on the complexity and the size of your company, you probably have to keep a few capital accounts. If you are running your business in the form of a corporation, you may have to create retained earnings accounts. These accounts indicate the cumulative profits of your firm since you establish it. Keep in mind that you have to minus the amount of cumulative profits from the dividends that your shareholders have received from the company.

A firm may buy its stock again, particularly if the stock market has undervalued it. The firm must record this transaction in a treasury stock account. Thus, when your company repurchases its own stock, this account will show how much it has paid.

Besides, when your company issues shares of the capital stock to its investors, a paid-in capital account reports the sum that your company gets. Instances of such an account consist of the common stock account and the preference shares account.

Sole proprietors do not have to keep capital accounts as those accounts are more related to the share capital. Rather, they need to keep a capital account which illustrates their initial investments. Every year, they need to calculate the profit (Also see Difference Between Balance Sheet and Profit & Loss Account) of their business and deduct all the withdrawals. Then, they should record that amount in their capital account.

Note that the drawing account acts as a contra account. Such an account consists of a debit balance which is the same as the sum of your withdrawal for private use in the present accounting period. As an instance, if you have withdrawn RM500 from the bank account of your business to pay for the furniture you buy for your house, the double entry (Also see Advantages of double entry accounting) is to debit this amount in your drawing account and credit the cash in bank account.

When an accounting period has ended, you need to close the drawing account and transfer its balance to your capital account. Keep in mind that the amount of the capital account’s balance should be the same as the sum of the assets less the sum of liabilities of your business.

You may need a lot of time and effort to prepare capital accounts if you do not have prior knowledge of accounting. Hence, you may hire an in-house accountant or employ an accounting firm in Johor Bahru to ensure that you always stay on top of the finances of your business.