What is a Capital Account?

A capital account is used by sole proprietorships and partnerships to track the net investment balance of their owner(s) from the perspective of the business. The amount in this account is the undistributed balance owed by the business to each owner when the organization is eventually shut down. However, the amount actually paid out following this winding up process will likely be different, since the firm’s assets will probably sell for their market value, not their book value.

The balance in a capital account is usually a credit balance, though the amount of losses and draws can sometimes shift the balance into debit territory. It is usually only possible for the account to have a debit balance if an entity has received debt funding to offset the loss of capital.

In a partnership situation, a separate capital account is maintained for each of the partners.

Contents of the Capital Account

In essence, the capital account contains the following transactions:

+ Investments made by the owner or partner
+ Subsequent profits of the business
- Subsequent losses of the business
- Subsequent draws paid to the owner or partner
= Ending balance in the capital account