What is a Capital Account? Meaning, Features, and More.

हिन्दी में पढ़ें:

As per the accounting concept, a business is an artificial person so in the beginning business has nothing and it is not able to perform its activities like sales, purchases, receipts, payments, etc. So, to start the business activities business owner invests capital in the business which may include money, land, machinery, products, etc., and the capital account is used to manage the investment made by the business owner.

A capital account helps to manage the investment made by the business owner at one place which helps the management in various activities like decision-making, planning, etc. and it is managed along with the drawing account as both are related to each other. For example, capital account shows the investment of the owner, and the drawing account shows the withdrawal of the owner but at the end, the balance of the drawing account is transferred to the capital account. Note: The number of capital account and drawing account depends on the nature of the business.

What is a Capital Account? Meaning, Features, and more.

What is a Capital Account?

A capital account is a ledger account used to manage transactions related to capital. In simple terms, it records the investments made by the business owner along with the profit and loss of the business, withdrawals made by the owner for personal use, etc. In capital account, the rule of personal account is applicable because it is a representative personal account hence all investments, profits, and other elements that increase the capital are recorded on the credit side and all withdrawals, losses, and other elements that decrease the capital are recorded on the debit side.

The capital account is mostly used in sole proprietorships, partnership firms, limited liability partnership firms, etc. as in these businesses capital account is used to manage the capital-related transactions. In a capital account all the transactions are recorded as per the concept of ledger like debit transactions are recorded on the left-hand side which is also called the debit side and credit transactions are recorded on the right-hand side which is also called the credit side.


Features of Capital Account

Following are the features of capital account:

1. Representative Personal Account:

The capital account is a representative personal account as it represents the owner’s share and the rule of personal account applies to it i.e. all amounts received are recorded on the credit side and all amounts given on the debit side. In simple words, withdrawals, losses, etc. are recorded on the debit side, and investments, profits, etc. are recorded on the credit side.

2. Ledger Account:

Capital Account is a ledger account and being a ledger account the concept of the ledger is applicable in it due to which the transactions in it are recorded on the debit and credit side as per the prescribed rules like transactions are recorded with “To” on the debit side and “By” on the credit side, etc.

3. For Owner:

A capital account is an owner-based account as it only records the transactions related to the owner such as investments and withdrawals made by the owner, profit and loss of the business, and other factors that affect the capital, etc. In simple words, a capital account represents the owner’s share with details.

4. Help to Management:

The capital account helps the management of the business in various activities like planning, decision-making, etc. as it provides data about investments, withdrawals, etc. For example, it helps to find out how much and when the owner invested and withdrew. It records not only investments and withdrawals but also other elements affecting capital such as profits and losses.

5. Continuous:

Capital account is continuous/perpetual in nature as it continues as long as the business exists and at the end of the financial year its balance is carried forward to the next year and the closing balance is shown on the liability side of the balance sheet. Note: The closing balance of the current year becomes the opening balance for the next year and vice versa.


Read Also:


QNA/FAQ

Q1. What is a capital account?

Ans: A capital account is a ledger account used to manage transactions related to capital.

Q2. What type of account is the capital account?

Ans: The capital account is a representative personal account.

Q3. Which rule applicable in capital account?

Ans: In capital account rule of personal account is applicable.

Q4. Does the capital account have an opening and closing balance?

Ans: Yes, a capital account has an opening and closing balance, but only if a balance is available.

Q5. Write the features of the capital account.

Ans: Following are the features of capital account:

1. It is a representative personal account.
2. It is a ledger account.
3. It represents the share of the owner.
4. The rule of personal account applies to it.
5. It manages the transactions related to capital.
6. It helps the management in various activities.
7. It is continuous in nature.

Leave a Reply