capital account

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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.

An example can illustrate better how the capital account works. If three persons create an LLC and each contributes USD 20.000, the capital account of each owner starts with a record of USD 20.000. If by the end of the fiscal year the business reported a net income of USD 30.000, then each owner’s account would increase by USD 10.000 (provided all owners have the same share in ownership), for a total of USD 40.000 each. However, if partner A withdrew USD 5.000 his capital account would be for a total amount of USD 35.000. Partners B and C would still have USD 40.000 each.

[Last updated in November of 2021 by the Wex Definitions Team]