Introduction
The capital means the assets and cash in a business. Capital may either be cash, machinery, receivable accounts, property, or houses. Capital may also reflect the capital gained in a business or the assets of the owner in a company.
Types of Capital Accounts
A sole proprietor owns 100% of the business. The capital account of the proprietor is shown as the owner's in the company balance sheet.
Partners in a company and limited liability partnership (LLP) company hold capital accounts. When they enter, the individual is making a capital commitment to the business, investing in the business. Partner share of gains and losses is calculated on the basis of their capital share in the partnership agreement or LLP operating agreement.
Shareholders have shares of equity in a company. They buy shares and earn dividends depending on how many shares they own. They do have voting rights based on the shares they own.
How it Works?
Each company owner (except corporations) has a capital account, which is displayed as an equity account on the balance sheet. Equity is another word for ownership. This capital account for the following is added to or subtracted from:
Owner contributions are added to the account. This could be initial contributions when entering the company, or afterwards as required or agreed by the owners.
At the end of the financial year, the account is adjusted with the share of the profit or loss.
Also, the account is subtracted from any payments the owner takes for his or her personal use.
Importance of Capital Accounts
When you start a company and want a bank loan, the bank would like to see what you have invested in the business. If the owner does not have an interest in the company, he or she can walk away and leave the bag holding the money.
If you start a company, you're supposed to invest some money to get started. You may need to take out a personal loan to get the money to be used as an investment in the company.
