Owner’s Capital, also called owner’s equity, is the equity account that shows the owners’ stake in the business. In other words, this account shows the how much of the company assets are owned by the owners instead of creditors. Typically, the owner’s capital account is only used for sole proprietorships. Partnerships call their capital accounts members’ capital and corporate owners report their ownership in the common stock and retained earnings accounts. Some people due use the term owner’s capital as a generic owner’s equity account though.
Basically, the owner’s capital account represents the net assets of the company. It’s the amount of money left over after the company sells all of its assets and pays off all of its creditors. This remaining amount of money is what the owner actually owns.
Its balance is computed in much the same way that retained earnings is calculated for corporations. The ending owner’s capital account equals the beginning balance minus any withdrawals, plus contributions, plus or minus any net income or loss for the period. This formula is recalculated at the end of each year to find the balance at the end of the accounting period.
The owner’s capital account is important for financial accounting as well as tax accounting. Financial accounting tracks the balance in the capital account to calculate how much money the owner can withdrawal during a year and how much equity he or she has to borrow against. Tax accounting is more concerned with the taxation of owner’s basis in the capital account. If an owner withdrawals more from his capital account than his basis in the account, the excess withdrawals are taxed at different levels. This is generally more of a concern with partnerships, but sole proprietors still have to watch out for tax implications.
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