What Small Business Owners Need To Know About Capital Accounts
Being a business owner is exciting, but can also seem complex, especially when you’re first starting out. If you’re new to the business world and are thinking of starting a company, there are a few important things you should know about capital accounts. An owner’s capital account is the accounting of your investment in a given business, and is also sometimes called the owner’s equity. While it might seem like a complicated topic, there are a few key facts that can help break it down. To learn more about capital and why a capital account matters, read on.
Capital Refers to Money
The “capital” in capital accounts simply refers to money in one form or another. Capital can occur as cash or as various types of assets, including real estate, equipment, or outstanding invoices. By the same token, sometimes capital also refers to business equity or the amount of business investment.
Accounts Depend on Business Type
The way your capital account is structured depends on the structure and type of business you’re in. You may be the sole proprietor, meaning you own 100% of the company. You could be in a partnership or in a limited liability company, or LLC, meaning you contribute capital when you join the business and get a certain share of profits and losses. You could even be a corporation shareholder, meaning you get dividends and often the right to vote in corporate decisions based on how many shares you own.
The Account Is Added To or Subtracted From
Business owners’ capital accounts show up on balance sheets and various factors can add to them or subtract from them. This can include contributions from owners themselves, end-of-fiscal-year net profits or losses, and personal distributions are taken.
You’ll Have To Make a Capital Contribution
When you first join a business, you’ll likely have to put some money in. This is called a capital contribution, meaning you’ve given money or assets to this business, and it works to increase your equity interest in the company. Examples of these assets can include various types of property, including but not limited to vehicles, machinery, or computational tools.
If you’re just getting started in the business world, making sure you understand how the capital account of a business owner works is foundational to building your future potential for success. Keep these key facts in mind, and you can go into your new business venture with informed confidence.
