You learned earlier that the owner's capital account shows the amount of the owner's investment, or equity, in a business. So the Capital account represents money contributed (or invested) in the business by the owner(s). An initial investment by owner is often the very first transaction of a new business, and it would be recorded as follows:
|Cash increase||=||Capital increase|
Because the equityFinancial claims to property the owner has invested remains in the business year after year, Capital is a permanent account. Permanent accounts are accounts that are continuous from one accounting period to the next; balances are carried forward to the next period. Assets and Liabilities are also permanent accounts.
In this lesson, you also will learn about the subcategories of accounts under the Owner's Equity section that are temporary accounts. Temporary capital accounts are used to record information during the fiscal period that will be transferred to a permanent capital account at the end of the period.
Following successful completion of this lesson, students will be able to:
- Distinguish between permanent and temporary capital accounts.
- List the permanent and temporary account categories.
- List the four parts of the Owner's Equity category of accounts.
- Analyze revenue, expense, withdrawals, and capital investment transactions.
The above objectives correspond with the Alabama Course of Study: Accounting: Objective: 5
This lesson incorporates the following Literacy Standards: R4