Capital accounts are used to track funds contributed, drawings and share of profit of business owners. They can be adapted to suit any type of business entity including sole proprietors, partnerships, companies, trusts and funds.
Sole proprietorships only require a single capital account. Partnerships require a capital account for each partner. Trusts require a capital account for each beneficiary. Funds require a capital account for each member.
By default, capital accounts are reported as ‘Capital Accounts’ in the equity section of the Balance Sheet.
It is often necessary to rename the account. For example, if the business operates as a sole proprietorship, the account can be renamed to
Owner's equity under
Chart of Accounts.
Sole proprietors and partnerships are unincorporated. Companies are separate legal entities. Depending on the legal structure of the business, it may be nessessary to change the classification of Capital Accounts to ‘Assets’ if they are debit balances or to ‘Liabilities’ if they are credit balances, instead of ‘Equity’.
Each capital account has the following sub-accounts by default:
- Funds contributed
- Share of profit
Sub-accounts are useful to segregate the movements to each capital account. You can add, remove or rename sub-accounts under
Settings tab but the default sub-accounts may be sufficient for most businesses.
Drawings is a sub-account to track money a partner, beneficiary or member has withdrawn from the business. When you transfer funds from a business account to a member or if the business makes a payment of a private nature on behalf of a member, the transaction should be classified under the
Funds contributed is a sub-account to track money a member has contributed to the business. When a member deposits their personal money into a business bank account or cash account, the transaction should be classified under the
Funds contributed sub-account.
Share of profit
Share of profit is used to allocate the net profit for a specified period from retained earnings to capital accounts. Only certain types of legal entities are required to distribute profit to owners but if required it is usually done by an accountant at the end of a financial year.