Glossary
What is a capital account?
What the capital account records, how it looks for a proprietor, a partnership and a private limited company, and the entry when owners bring money in.
Updated
In short
A capital account records the money and assets the owners have put into a business. SimpleERP seeds an Owner's Capital equity account, and money brought in or taken out is posted to it with a manual journal.
A capital account records the owner's stake in a business. For a proprietor or partner it starts with the money and assets brought in, rises with the profit for each year, and falls with drawings, which are amounts taken out for personal use. It sits under equity in the balance sheet. In a company the equivalent is share capital plus retained earnings.
Capital account: a worked example
Lakshmi Steel Furnitures is a private limited company. Its two directors subscribed 50,000 equity shares of ₹10 each, paying ₹5,00,000 into the company's HDFC account. That is its capital account, and it has not changed since.
| Account | Debit | Credit |
|---|---|---|
| Bank (HDFC) | ₹5,00,000 | |
| Owner's Capital (share capital, 50,000 shares of ₹10) | ₹5,00,000 |
How does a capital account differ by type of business?
| Business | What the capital account holds | How owners take money out |
|---|---|---|
| Proprietorship | Money brought in, plus each year's profit, less drawings | Drawings, debited to capital |
| Partnership | One capital account per partner, often with a current account for salary and interest | Drawings, debited to that partner's account |
| Private limited company | Share capital only; profit kept is retained earnings, a separate line | Salary or dividend, never drawings |
FAQ
Questions, answered
Is drawings an expense?
Drawings are not an expense. They are money a proprietor or partner takes for personal use, so they reduce capital, not profit. Booking household spends as business expenses understates profit and causes trouble with income tax. Keep drawings in their own account.
Can a company director take drawings from capital?
A director of a private limited company cannot take drawings. Share capital stays in the company; directors are paid a salary, or shareholders a dividend out of retained earnings. Money taken without either is a loan to the director, with its own rules under the Companies Act.
Do partners each need a capital account?
Partners each need a capital account. Each partner usually has a capital account and often a current account for salary, interest and drawings. In SimpleERP create one equity sub-account per partner under Owner's Capital and post their entries to it.
Is capital the same as cash in the bank?
Capital is not cash in the bank. Capital is what the business owes its owners on paper; the money may have been spent on stock, machines or customer credit. A business can have high capital and little cash, or the reverse.
Related
Keep reading
Retained earnings
Profits the business has kept over the years instead of paying them out to owners or shareholders.
Read moreBalance sheet
Assets, liabilities and equity on one date, always in balance.
Read moreOpening balance
The balance an account carries into the first day of a new set of books, taken from the old books' closing figures.
Read more
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