# Capital Account Calculations Question

Hi all,

I’m having an issue where I believe that Manager is calculating capital account transaction incorrectly. My capital account is currently in the negatives (which is fine) and for each expense claim transaction allocated to the Cap account, the negative figure counts backward toward zero which I believe is incorrect.

Each expense allocated to the Cap account should be increasing the negative figure whereas any amounts/profits paid back into the Cap account should be decreasing the negative figure. In my case, all expenses being paid from Cap account are decreasing the negative figure (back to zero) and any profits paid into the account are increasing it.

Furthermore, I’ve also noticed that on the Summary page, the capital account entry on the balance sheet reads the -\$xyz figure however when I click it, it opens the Capital Account which appears to display the figure as a surplus amount (without the -) which would explain why the calculation logic mentioned above is back to front!

Ideas? Bug?

Capital accounts are credit accounts. That means they are increased by credits. And they are stated on the Summary from the perspective of the business. A positive balance means the business owes money to the owner of the capital account. That is, the owner has contributed more capital than has been withdrawn. A negative balance means the owner has withdrawn more capital than contributed, normally because of profits taken out of the business. It sounds like you already knew that. But I reiterated these basic principles as context for my explanation.

When you purchase something for the business with personal funds, an expense claim debits an expense account and credits a capital account (assuming the expense claims payer is a capital account owner). Therefore, the capital account moves in the positive direction (becomes less negative). So, your statement that an expense claim allocated to the capital account should increase the balance is correct. But increasing the balance means moving it in a positive direction, not making the negative balance more negative. Your personal funding of a company expense is an equivalent contribution of capital. The business now owes you more money.

At the same time, profits distributed from Retained earnings debit that account and also credit the capital account, making it more positive. This is because the business no longer retains those profits but now owes them to the capital account owner.

So, both expense claims and earnings distributions are having the correct effect. Your second question actually highlights the source of your confusion. If you drill down on the capital account balance, you do see the number with a reversed sign. This is simply the result of traditional accounting conventions. Balance sheets have historically shown all balances as positive numbers when they are in their expected range. So asset accounts show as positive numbers, but so do liability and equity accounts, even though they really have opposite mathematical signs. (The exception, of course, is contra accounts, which normally show as negative balances.)

If you continue drilling down on capital accounts, you eventually get to a screen where transactions are shown as debits and credits rather than positives and negatives. These are what really matter. In fact, the choice of positives and negatives for debits and credits is an arbitrary one made by the programmer. You can build accounting software where the choice is reversed, and everything will be just as accurate.

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Thanks Tut, appreciate the comprehensive response.

Makes absolute sense, I’ve been exposed to a few different ways of visual representation, I think it was just a combination of lines crossed and late night accounting.

Thanks again.