It can easily be said that capital represents the lifeblood of a business. Capital, or the assets of a business, includes cash, accounts receivable, equipment, inventory, land, and buildings. Importantly, it also includes the owner’s investment in a business and the accumulated wealth of a business.
In accounting, there are five business capital accounts found in the financial statements:
• Income accounts, showing what a business has earned.
• Expense accounts, reflecting the costs of running the business.
• Asset accounts, summarizing what the business owns.
• Liability accounts, showing what the business owes to others.
• Capital accounts, listing the owner’s investment.
These business capital accounts are important to lenders who want to judge an owner’s “stake in the game.” They are important to all other stakeholders including employees and vendors to help them gauge the health and “going forward” prospects of the business.
Business Structures and Their Capital Accounts
Different business structures will have somewhat different business capital accounts:
• Shareholders in an incorporated entity will have shares of ownership, giving them rights to distributions of dividends.
• Members of a partnership or a limited liability company (LLC) will share in the company’s profits and losses based on their partnership or operating agreement and their share of capital.
• S-Corps. An S-corporation owner is a shareholder, but that account works like a partnership instead of a corporation.
• Sole proprietorship. A sole proprietor has 100 percent business ownership of the capital account.
How do Owner’s Business Capital Accounts Function?
For partnerships, sole proprietorships, and S-Corps, business capital accounts include the following accounting entries:
Funds in: Investments made by the owner or partners.
Funds in: Profits of the business.
Funds out: Losses of the business.
Funds out: Draws made to the owner or partners.
Total: The ending balance from these entries.
It is critical to know that these entries have tax implications.
Seek Expert Financial Assistance
Contact Northgate Capital Finance for financial solutions to address your capital needs. Our experienced financial professionals can help you secure funding to meet your business’s financial needs and goals.