Capital Account
Capital Account
The capital account forms part of owners equity.
![c1](https://seeaccountingnow.online/wp-content/uploads/2022/02/c1.jpg)
Owner’s equity is the difference between assets and liabilities
![c2](https://seeaccountingnow.online/wp-content/uploads/2022/02/c2.jpg)
It shows how much money is owed to the business’s owners or shareholders
![c3](https://seeaccountingnow.online/wp-content/uploads/2022/02/c3.jpg)
Theoretically, if the business cashed out its assets.
![c4](https://seeaccountingnow.online/wp-content/uploads/2022/02/c4.jpg)
Then used this money to repay loans etc.
![c5](https://seeaccountingnow.online/wp-content/uploads/2022/02/c5.jpg)
The difference would belong to the owner.
![c6](https://seeaccountingnow.online/wp-content/uploads/2022/02/c6.jpg)
How The Capital Account is Made Up
In combination with the retained earnings account, the capital account shows money owed to the owner
![c7](https://seeaccountingnow.online/wp-content/uploads/2022/02/c7.jpg)
It is made up by or influenced by money invested by owners or shareholders
![c8](https://seeaccountingnow.online/wp-content/uploads/2022/02/c8.jpg)
Along with retained earnings resulting from profits made along the way.
![c9.1](https://seeaccountingnow.online/wp-content/uploads/2022/02/c9.1.jpg)
Less any withdrawals made by the owners or dividends paid to shareholders..
![c10](https://seeaccountingnow.online/wp-content/uploads/2022/02/c10.jpg)
Recording Capital Contributions
To start a business, the business owner may invest some of their own capital.
![c11](https://seeaccountingnow.online/wp-content/uploads/2022/02/c11.jpg)
The business owner would deposit the money in the business’s bank account.
![cp11](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp11.jpg)
To record the transaction, you use the capital account and the cash account.
![cp12](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp12.jpg)
You credit the capital account.
![cp13](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp13.jpg)
This shows the money came from capital.
![cp14](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp14.jpg)
Then you debit the cash account.
![cp15](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp15.jpg)
This shows the money was deposited in the bank.
![cp16](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp16.jpg)
Recording Retained Earnings
Once set up, the business will start trading.
![cp17](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp17.jpg)
This usually results in a profit.
![cp18](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp18.jpg)
At period-end, the income & expense accounts are closed out to income summary.
![cp19](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp19.jpg)
The account’s balance will equal the profit or net income for the period.
![cp20](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp20.jpg)
You need to transfer this balance to retained earnings.
![cp21](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp21.jpg)
Retained earnings is money owed to the owner, as well.
![c22.0.1](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.0.1.jpg)
But you don’t transfer it to the capital account at period end.
![c22.1](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.1.jpg)
To do so would imply the business no longer has any retained earnings
![c22.2](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.2.jpg)
Still, retained earnings impacts on how much money is owed to the owner
![c22.3](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.3.jpg)
To determine this, you need to add retained earnings to the capital’s account’s balance
![c22.4](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.4.jpg)
You can do this easily on the balance sheet, where retained earnings are shown as a line item next to owner’s capital.
![c22.5](https://seeaccountingnow.online/wp-content/uploads/2022/02/c22.5.jpg)
Recording Withdrawals
Periodically, the owner will withdraw money from the bank for personal use.
![cp23](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp23.jpg)
When this happens, you show that money comes from the bank and goes to the owner
![cp24](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp24.jpg)
To record this transaction, you show that money came from the bank—and went to the owner
![cp25](https://seeaccountingnow.online/wp-content/uploads/2021/11/cp25.jpg)
At period-end, you close out the withdrawal account to the capital account
![c25.1](https://seeaccountingnow.online/wp-content/uploads/2022/02/c25.1.jpg)
To do this, you credit the withdrawal account to show you have taken value from it.
![c25.2](https://seeaccountingnow.online/wp-content/uploads/2022/02/c25.2.jpg)
Then you debit the capital account to show you assigned the value to capital.
![c25.3](https://seeaccountingnow.online/wp-content/uploads/2022/02/c25.3.jpg)
The capital account has a credit balance.
![c35](https://seeaccountingnow.online/wp-content/uploads/2022/02/c35.jpg)
So the debit entry will reduce the account’s balance.
![c36](https://seeaccountingnow.online/wp-content/uploads/2022/02/c36.jpg)
This shows the business now owes less to the owner
![c37](https://seeaccountingnow.online/wp-content/uploads/2022/02/c37.jpg)