It is true that no business can be started with out money. Therefore, before starting any business, a businessman invests some money in to business. This investment is called as capital. In other words, the capital means the interest of owner or owners in the assets of business firm.

The capital can be classified in to following categories according to the type of business firm:-

Proprietor’s capital:- In proprietorship firm single person is the owner of the business firm. In this case, the money invested in to business, will be called as proprietor’s capital. At the end of financial years when the profit and loss account is prepared then the balance of profit and loss account is transferred in to capital account. Drawings made by the proprietor during the financial year are also transferred into capital account.

Partner’s Capital:- When two or more persons start a business on partnership basis then they have to invest money in to business, as agreed by them. The investment made by individual partner will be called as partner’s capital. At the end of financial years when the profit and loss account is prepared then the balance of profit and loss account is transferred in to capital account of partners in the profit and loss ratio as agreed by them.

Drawings made by the partners during the financial year are also transferred into capital account of the partners. The interest on capital is also credited to the partner’s capital account if not paid during the financial year. Similarly the interest on loan given to partners is debited to capital account of the partner if not paid by him during the financial year.

Capital of Limited Companies by Shares:- It is called share capital also. When a fixed amount is divided into small units then we call it shares. When the money is received by company after selling the shares that is called share capital. It means public can make contribution to the common stock of company. The Company has following type of capital:-

A)   Authorized Share Capital
B)   Issued Capital
C)   Subscribed Capital
D)   Called-up Capital
E)   Paid-up Capital
F)   Reserve Capital

Accounting Treatment of Capital

a) In case of amount invested by a proprietor in cash:-

Type of voucher to be prepared: Cash Receipt Voucher

Entry to be made:-

Debit:-  Cash Account

Credit:-  Proprietor’s Capital Account

b) In case of amount invested by a proprietor by cheque:-

Type of voucher to be prepared: Bank Receipt Voucher

Entry to be made:-

Debit:-  Bank Account

Credit:-  Proprietor’s Capital Account

c) In case of amount invested by a partner in cash:-

Type of voucher to be prepared: Cash Receipt Voucher

Entry to be made:-

Debit:-  Cash Account

Credit:-  Partner’s Capital Account

d) In case of amount invested by a partner by cheque:-

Type of voucher to be prepared: Bank Receipt Voucher

Entry to be made:-

Debit:-  Bank Account

Credit:-  Partner’s Capital Account

 e) In case of Limited Companies, fully paid shares through cheques by the shareholder-

Type of voucher to be prepared: Bank Receipt Voucher

Entry to be made:-

Debit:-  Bank Account

Credit:-  Share Capital Account

Treatment of Capital Account in final accounts

In all above cases, the Capital Account is shown in liabilities side of balance sheet.

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