What are capital accounts?

Definition of capital accounts

A business's capital accounts contain the value of how much it owes to its owners.

A debit to a capital account means the business doesn't owe so much to its owners (i.e. reduces the business's capital), and a credit to a capital account means the business owes more to its owners (i.e. increases the business's capital).

Capital accounts in double-entry bookkeeping

In double-entry bookkeeping, there are five types of nominal accounts:

• Income accounts: what the business has earned
• Expense accounts: the business's day-to-day running costs
• Asset accounts: what the business owns
• Liability accounts: what the business owes
• Capital accounts: what is owed to or by the business owner.

How debits and credits work for different accounts

To increase the amount in your business accounts, you need to debit some accounts and credit others. What you do depends on the kind of account you’re dealing with:

• for an income account, you credit to increase it and debit to decrease it
• for an expense account, you debit to increase it, and credit to decrease it
• for an asset account, you debit to increase it and credit to decrease it
• for a liability account you credit to increase it and debit to decrease it
• for a capital account, you credit to increase it and debit to decrease it

Example of a capital account

A limited company will often be owned and managed by the same person or group of people, so the directors and the shareholders will be the same individual(s).

If the business is a limited company or LLP, the amount of profit made by the business in previous years that has not yet been paid out to the shareholders or members is also a capital account - because it is money that could theoretically be taken out by the owners.

If you are a shareholder-director, then money that you spent on shares in the company will go into a capital account, usually called 'share capital'. Any other money that the company owes you, such as unpaid wages or costs you've paid for personally, goes into your 'director's loan account', which is a liability account of the business.

Where to find your capital accounts

Capital accounts appear on the business's balance sheet, at the bottom.

The amount in the capital accounts will always equal the amount in all the asset accounts, less the amount in all the liability accounts, because if the business sold all its assets and paid all its debts, the difference would be left over for the business owner to keep.

Generating balance sheets with bookkeeping software

FreeAgent's powerful bookkeeping software enables you to generate balance sheets, so you or your accountant can dig into your business's accounts in more detail as and when you need to.