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Definition of Capital Account
In accounting and bookkeeping, a capital account is a general ledger account that is part of the balance sheet classification:
- Owner’s equity (in a sole proprietorship)
- Stockholders’ equity (in a corporation)
Examples of Capital Accounts
The sole proprietorship of J. Lee will include the following capital accounts:
- J. Lee, Capital, which is increased by J. Lee’s investment into the business plus each accounting period’s net income, and which is decreased by the debit balance in the account J. Lee, Drawing
- J. Lee, Drawing, which is a temporary account that records the proprietor’s draws during the year. At the end of the year, the account’s debit balance will be closed to owner’s capital account
A corporation will likely have the following capital accounts:
- Paid-in capital accounts such as Common Stock, Preferred Stock, Paid-in Capital in Excess of Par, which are used to record the amounts received by the corporation when shares of its capital stock were originally issued to investors.
- The account Retained Earnings which consists of the amount of the corporation’s earnings since the corporation was formed minus the dividends distributed to the stockholders since the corporation was formed.
- The account Treasury Stock, which has a debit balance representing the amount paid by the corporation to repurchase its own shares of stock which it did not retire.
Capital Account Sub accounts
There are two primary subaccounts within the capital account:
1. Capital Transfer
In the capital transfer subaccount, there are three sections or delegations for transactions:
- Forgiveness of debt – The only portion of debt listed is the principal and any interest payments that are overdue. Future interest payments are not included in the measurement.
- Insured, catastrophic loss – Includes infrequent, large insurance payments made by foreign insurance companies. It is the BEA’s responsibility to determine with each transaction if it is reasonable to be called a catastrophic loss.
- The third piece of the capital transfer subaccount is highly specific and deals explicitly with the transfer of U.S. governmental assets by the Panama Canal Commission directly to the Panamanian Republic.
2. Acquisition/Disposal of Non-Produced, Non-Financial Assets
The second subaccount – acquisition/disposal of non-produced, non-financial assets – measures the buying and selling of both tangible and intangible assets.
Tangible assets include things such as rights to natural resources, which include the right to mine for minerals and precious metals or to drill for oil at offshore drilling sights.
Intangible assets are anything of value that can’t physically be handled, which include things such as intellectual property rights, trademarks, patents, and copyrights.
