What Is a Capital Account and How Does It Work?
When you start your company, you must have funds to purchase your initial necessities. Whether you plan to operate as a sole proprietor or have partners in your ventures, each business owner must invest either cash or property in your organization to get funding from the bank or open your doors. This contribution is recorded in what is called a capital account.
When You Start Your Business
When you first open your company, you must use your own money to pay for a down payment on rent or to get initial equipment. As the business owner, you might also donate items such as computers, desks, or filing cabinets to get started. These are considered a capital contribution. Anything that you put towards the company, whether it is actual funds or physical possessions, falls under this category. Whatever you invest must be given a value so that it can be credited to your account when the financial statement is done for your organization. This should be done for every business owner who contributes something to the start-up of the company.
How To Account For Your Contributions
Each business owner of your company will have a line on the financial statement marked as equity. This indicates the amount of money you have invested in your organization. When you add additional money into your capital account, that number will increase to reflect the contribution. You can also withdraw money from it to use for your own personal purposes. The number will decrease when this happens. At the end of your fiscal year, the balance of your capital account is calculated against the final statement of the company to determine whether you made money personally or suffered a loss.
Why You Should Have a Capital Account
Your company has an emergency or is ready to expand. You, as the business owner, need extra funding to pay for these expenses. When you contact your financial institution to apply for a loan, there are several items that they require before they will consider your requests such as your credit rating and current business plan. They also would like to see your personal investment in your company so that they are assured that you will stay committed to paying off the loan instead of leaving your business after they grant you the money you asked for. Providing them with the information that you have on your capital account gives them the incentive to approve your loan.