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What is a capital account?

In accounting and bookkeeping, a capital account is one of the general ledger accounts used to record 1) the amounts that were paid in to the company by an investor, and 2) the cumulative amount of the company's earnings minus the cumulative distributions to the owners. The balances of the capital accounts are reported in the owner's equity, partners' equity, or stockholders' equity section of the balance sheet.

In a corporation the capital accounts include:

  • Paid-in capital accounts such as Common Stock, Preferred Stock, Paid-in Capital in Excess of Par. These accounts report the amounts received by the corporation when the shares of its capital stock were originally issued to investors.
  • Retained earnings accounts which typically contain the amount of the corporation's cumulative earnings since the corporation was formed minus the cumulative dividends distributed to the stockholders.
  • Treasury stock account (a contra account because it has a debit balance) usually reporting the amount paid by the corporation to repurchase its own shares of stock that have not been retired.

In a sole proprietorship (such as one owned by Amy Fox) the capital accounts include:

  • Amy Fox, Capital. This account begins with Amy's original investment and is increased for each year's earnings minus each year's withdrawals by Amy.
  • Amy Fox, Drawing. This account is a contra account because it will have a debit balance equal to the amount of business assets that Amy has withdrawn during the current accounting year for her personal use. At the end of each accounting year, Amy's drawing account is closed by transferring its debit balance to the account Amy Fox, Capital.

The total of the balances in 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 the company's market value or net worth.