DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Sign reversals on Capital Accounts Summary


#1

I do not know when this problem appeared, but signs are reversed on the Capital Accounts Summary. The example below includes two capital accounts, for both of which all transactions were contributions, expense claims by capital account members, or distributions of shares of profit from retained earnings. So everything should be positive. Instead, everything is negative:

The Statement of Changes in Equity and Capital Accounts balances are correct for the same period.


#2

Hmm, @tony what’s your opinion on this? My argument would be that contributions, expense claims and share of profit are credit transactions on capital accounts so amounts being shown as negative is correct.


#3

There is no question these are credits. My view is that the report should be from the perspective of its audience. A partner’s capital account increases when she contributes funds or when the business allocates a share of profit to her. So she would expect to see her balance move in the positive direction. This is similar to a bank statement, where funds available to you are shown as positive numbers. These example transactions also contribute to a more positive balance in the equity section of the balance sheet. So in my experience, they are shown as positives in the capital account.

Think of a situation where the partner needs to pay tax on the appreciation of the investment in the business, the difference between what is invested and what the business is sold for. A contribution should drive the capital account balance upwards, closer to the sale price, thus reducing the taxable gain. Drawings during the period of ownership would drive the capital account downward, widening the gap between capital account balance and sale price, thus increasing the taxable gain. In some jurisdictions, those drawings are not taxable at the time they are taken, because they are considered a return of capital. Instead, they are taxed upon sale of the partner’s interest in the partnership. So the report should show credit balances as positive figures.


#4

Is it a matter of perspective?

Just like the budgets I have to insert ‘-’ in front of expenses item value number for the formula to work properly.

it means the internal calculation and numbers should not be shown as it will confuse the audience such as stakeholders and taxmen? In other words report only shows the number of what they gain and lose in laymen terms, but not in perspective of accountant and Mathematicians?

Something like that?


#5

In my opinion, yes. This is similar to the way a profit and loss statement can show both income and expense account balances as positive numbers. The positive/negative sign is implied by the context. (This example raises another reason the current convention on the Capital Accounts Summary is backwards. If a group in the P&L side of the chart of accounts is not set to Expenses by checking the box, debits will show as negative numbers. Yet the Capital Accounts Summary is showing debits as positive numbers.)


#6

oh now I get it…
I agree with @Tut. but then when you insert expense claims side by side is undeniable the effect will reduce the company’s value.

The issue for accounting perspective Stakeholders contribution is not company’s money. So are we looking at company’s perspective or Stakeholders?

Might need to add Stakeholder’s report for their understanding. :wink:


#7

Yes. An expense claim by a partner or other capital account member is equivalent to a contribution of capital. The member has paid for a company expense with personal funds, just as if those funds had first been contributed (increasing both the bank account asset and capital account) and then paid from the bank account. In that situation, the capital account would still have been made more positive by the contribution of capital.

If I understand your question correctly, they are the same. A member’s capital account represents his/her investment in the business. If the business were to be terminated, the balance of the capital account would be paid out to the member. That is the nature of an equity account.

That is what the Capital Accounts Summary should be.


#8

To ensure consistency is maintained, financial reports should be presented from a business perspective and negatives should represent capital accounts with a credit balance.


#9

Then how come the financial report “Balance Sheet” presents the Equity section as positives even though the accounts have credit balances.


#10

Doesn’t look like we have a consensus on this. What do accounting standards say?


#11

I agree with @Brucanna in relation to balance sheets. However, with supplementary capital account reports in speadsheet format, I prefer the credits shown as negatives.


#12

The issue for me if I’m wrong correct me, the Capital Accounts in Balance sheet does not show the drill down details of the member’s increase of it’s capital or not. In some case we still need to supply the Capital Accounts Summary to show the details. just like the Fixed Assets.

The crucial part is whether the report is for other’s understanding or just for someone like us who knows how manager works. and have the accounting knowledge.


#13

Surely the report format shouldn’t be the determiner, but rather the readability of the data.
But once again, where is the consistency ?

The “Statement of Changes in Equity” - a vertical spreadsheet (opening balance to closing balance per account) - has credit balances as positives, YET, the “Capital Accounts Summary” - a horizontal spreadsheet (opening balance to closing balance per account) has credit balances as negatives.

Therefore, why is “contributions” (putting funds in) under one report being shown as a positive, yet by switching the reports orientation, those same “contributions” are being shown as a negative.


#14

@Brucanna has reinforced my earlier point about differences between reports.

While not an ccounting standard, here is what accountingcoach.com says about a capital account:

This account begins with [the account owner’s] original investment and is increased [emphasis added] for each year’s earnings minus each year’s withdrawals…

From accountingtools.com:

A capital account is used by sole proprietorships and partnerships to track the net investment balance of their owner(s) from the perspective of the business. In essence, the capital account contains the following transactions:

+ Investments made by the owner or partner

+ Subsequent profits of the business

- Subsequent losses of the business

- Subsequent draws paid to the owner or partner

= Ending balance in the capital account


#15

Thanks @Brucanna and @Tut. I agree with your comments on the capital accounts report and how it will be more meaningful to business proprietors to present credit balance capital accounts as positive and debit balance capital accounts as negative amounts.


#16

The main issue is that unlike Statement of Changes in Equity which is always breaking down accounts appearing under Equity section on balance sheet, this report could be breaking down accounts located in assets, liabilities or equity.

If your capital control account is categorized under Assets, then the report is consistent with balance sheet. If capital control account is categorized under Liabilities or Equity, then the report is not consistent with balance sheet since the signs will be in reverse.

Then there is another issue where you can have multiple control accounts across either Assets, Liabilities or Equity at the same time. So maybe the right way to approach this report would be that you have multiple control accounts, then report will be able to break down single control account at the time and the sign of figures will be determined by the placement of that control account on balance sheet. This way the solution will be always “correct”.

Anyway, I’ll let it sink for a bit and for the time being, I’ve added a checkbox which will allow you to manually reverse signs on the report.


#17

@lubos I prefer to keep the sign reversal as the solution instead of introducing multiple control accounts. Especially if a business operates through a trust structure with many beneficiaries, it may be confusing to have beneficiary loan accounts dispersed into assets and liabilities.