Accounting – What is a capital account?
A company’s capital account shows the value of how much it owes to its stakeholders. In accounting, a capital account is among the ledger accounts and it’s is used to record the amount each investor paid to the company as equity (Also see Statement of Equity). Additionally, the business’s earnings flowing from profit and loss during the year and accumulated earnings brought forward less the accumulated distributions to the investors is recorded in this account. Note that you should record all balances of the capital account in the partner’s equity, shareholders’ equity, or owner’s equity sections of the balance sheet.
Depending on the size and complexity of your business, you may need to keep multiple capital accounts. If you own a corporation, you may need to keep retained earnings accounts. These accounts show your business’s cumulative earnings from the time it was formed. Note that you should deduct from this cumulative earnings figure the dividends that your company has paid to its shareholders.
A company is allowed to repurchase its stock especially if the stock is undervalued in the stock market. This transaction must be recorded in treasury stock account. Therefore, the treasury stock account that shows the amount your company pays when it repurchases its own shares of stock.
Paid-up capital accounts report the amount your company receives when it issues shares of capital stock to investors. Examples of paid-up capital accounts include preference shares account, common stock account, and the paid-up excess capital accounts.
If you are sole proprietor, you don’t need to keep capital accounts that are associated with share capital. Instead, you should keep a capital account that shows your original investment. For each year, you should calculate your business earnings minus the withdrawals and record the resulting amount in this account.
Keep in mind that the drawings account is a contra account. It contains a debit balance that is equivalent to the amount you have withdrawn for personal use during the current accounting period. For example, if you withdraw $200 from your business bank account to pay school fees for your son, this amount should be debited in the drawing account.
At the end of the accounting period, you should close the drawing account by transferring its balance to the capital account. Note that the sum of the balances in the capital account must be equal to the total of your business’s assets minus the total of its liabilities.
Preparing capital accounts could be difficult especially if accounting isn’t your thing. Therefore, it is advisable to employ an accountant or engage an accounting firms in Singapore for guidance.