capital account

A capital account is used in accounting to record individual ownership rights of the owners of a company . The capital account is recorded on the balance sheet and is composed of the following items:

• Owner’s capital contributions made when creating the company or following the creation, as required by the business . These capital contributions add to the capital account.
• At the end of each fiscal year , net income or net losses proportional to the owner’s ownership rights are added or subtracted, respectively, to the capital account.
• Finally, any distributions of profit made in favor of, or authorized personal withdrawals made by, the owners are subtracted from the capital account.

For example: If three individuals create an LLC , and each contribute $20.00, the capital account of each owner starts with a record of $20.00. If by the end of the fiscal year the business reported a net income of $30.00, then each owner’s account would increase by $10.00 (provided all owners have the same share in ownership), for a total of $40.00 each. However, if partner A withdrew $5.00, his capital account would be for a total amount of $35.00. Partners B and C would still have $40.00 each.

[Last reviewed in November of 2024 by the Wex Definitions Team ]

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