In accounting, capital refers to the amount invested by the proprietor in business. It can be in the form of cash, furniture, machinery, or any other asset.
Suppose Mr. A started a business and he brought cash Rs. 10,00,000 , machinery Rs. 500,000, a building of Rs. 20,00,000. Here all these assets will be part of capital which means their total, i.e., Rs.35,00,000 will be his capital.
Capital particularly has two types :
1. Initial Capital -This refers to the capital invested by the proprietor in the business at the time of its start/ initiation.
2. Additional Capital - Any asset introduced by the owner in an already running business is called additional capital.
What is Capital Account ?
The capital account is the general ledger account. It is prepared to show the amount contributed by the owner/partner/shareholders in the business and part of the retained earnings (part of profit not distributed) also. It shows the amount that the entity owes to the owner/partner/shareholders.
How capital is shown in books of accounts?
Accounting Treatment :
Suppose Mr. D started a business with cash of Rs.200,000 and furniture of Rs. 30,000.
Remember,
Capital brought = capital account is credited
Capital withdrawn = at that time drawings debited
* only at time of permanent withdrawal of capital , capital account is debited
Journal Entry :
In this case, the capital account will be credited with Rs.2,30,000 and assets will be debited with their respective amounts.
So,
Date | Particulars | L.F. | Dr. Amount | Cr. Amount |
| Cash A/c - Dr. |
| 200,000 |
|
| Furniture A/c - Dr. |
| 30,000 |
|
| To D’s Capital A/c |
|
| 2,30,000 |
| (Being capital introduced in business by owner) |
|
|
|
Ledger Account :
At the time of posting, all assets brought by the owner are posted on the credit side of the capital account.
D’s Capital A/c
Dr. Cr. | |||||||
Date | Particulars | J.F. | Amount | Date | Particulars | J.F. | Amount |
| To balance c/d |
| 2,30,000 |
| By cash A/c |
| 200,000 |
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| By furniture A/c |
| 30,000 |
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| 2,30,000 |
|
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| 2,30,000 |
Balance Sheet :
Balance Sheet
Liability | Amount | Assets | Amount |
D’s Capital | 2,30,000 |
|
|
|
|
|
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How it is written in different forms of Business ?
Sole Proprietorship business:
In the sole proprietorship, the word capital is written or the name of the owner is prefixed before writing the word capital.
For example, Ram is the sole proprietor of ABC Ltd. Here one can write either as a capital account or Ram’s capital account.
Partnership firm :
In the case of a partnership firm, the name of partners is written before writing the word capital.
For example, S and T are partners of a partnership firm. So their capital accounts will be written as S’s capital A/c and T’s Capital A/c.
Joint-stock Companies / Corporations :
Usually, shareholders/stockholders invest money in joint-stock companies. So here, money invested by them is the capital for the company. Here word share capital is written to show the capital of the company.
It has different categories, i.e., Authorized Share Capital, Subscribed Share Capital, etc.
From the above, we suppose now the meaning, types, and treatment of capital is clear to you. Stay tuned with us at Ace your Grades for information on related topics.
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