A capital account records transactions with the owner, including the owner’s initial and additional investments in the business over time. It also tracks the owner’s share of profits earned and any withdrawals made. Capital accounts are considered representative personal accounts because they represent a person who may not be present for the transactions.
Types of Personal Accounts
- Natural accounts: Represent real people.
- Artificial accounts: Represent legal entities like companies.
- Representative accounts: Record transactions for people who are not present.
Partner Transactions and Capital Accounts
When a partner leaves a business, they may pay a bonus to the remaining partners by not taking their full capital account balance. The remaining balance gets allocated between the partners who stay. A capital account reflects:
- Amount contributed to a partnership or company.
- Increases with allocated income.
- Decreases with allocated losses and distributions.