What is a capital account?

Definition of Capital Account

In accounting and bookkeeping, a capital account is a general ledger account that is part of the balance sheet classification:

  • Owner's equity (in a sole proprietorship)
  • Stockholders' equity (in a corporation)

Examples of Capital Accounts

The sole proprietorship of J. Lee will include the following capital accounts:

  • J. Lee, Capital, which is increased by J. Lee's investment into the business plus each accounting period's net income, and which is decreased by the debit balance in the account J. Lee, Drawing
  • J. Lee, Drawing, which is a temporary account that records the proprietor's draws during the year. At the end of the year, the account's debit balance will be closed to owner's capital account

A corporation will likely have the following capital accounts:

  • Paid-in capital accounts such as Common Stock, Preferred Stock, Paid-in Capital in Excess of Par, which are used to record the amounts received by the corporation when shares of its capital stock were originally issued to investors.
  • The account Retained Earnings which consists of the amount of the corporation's earnings since the corporation was formed minus the dividends distributed to the stockholders since the corporation was formed.
  • The account Treasury Stock, which has a debit balance representing the amount paid by the corporation to repurchase its own shares of stock which it did not retire.

Other Information on Capital Accounts

The total of the balances in all of the capital accounts must be equal to the reported total of the company's assets minus its liabilities. Because of the historical cost principle and other accounting principles, the total amount reported in the capital accounts will not indicate a company's market value.