Capital account is which type of account?

A capital account is a personal account as per the traditional rules of accounting.

The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account:

• Real account generally represents assets or possessions of a business other than those which are related to any person (debtors account).

Such accounts don’t close by the year-end and are carried forward.

Examples are cash account, bank account, fixed accounts etc. The golden rule of accounting for real accounts is: “Debit what comes in, credit what goes out.”

• Nominal accounts are the accounts that represent the income, expense, gain or loss of an entity.

Examples are salaries account, purchase account, sales account etc. Such accounts are closed at the year-end to the profit and loss account.

The golden rule of accounting for the nominal account is: “Debit all expenses and losses and credit all incomes and gains”

• Personal accounts are the accounts that represent a person. For example, a debtors’ account represents the persons to whom a business owes money. Likewise, the creditor’s account, any personal loan account etc

The golden rule of accounting for personal accounts is: “Debit the receiver and credit the giver”

A capital account is therefore a personal account as it represents the money invested by the owner of a business. It is shown in the liabilities side of the balance sheet because it is an internal liability of a business; the money is to be paid back to the owner on liquidation.

Let’s a journal entry related to capital account to understand the golden rules of accounting for personal accounts:

Example,

Cash A/c           Dr      Amt

To Capital A/c            Amt

( Being cash introduced into the business)

As cash comes into the business as capital and is given by the owner (who is a person), the Capital A/c is credited (credit the giver).

Now, there are modern rules of accounting too. As per the modern rules of accounting, there are five types of accounts. One of which is the capital account.

Capital when increased, it is credited and when decreased it is debited.

Here are a few entries related to capital account:

Cash A/c       Dr   Amt

To Capital A/c       Amt (Credited as capital is increased)

(Being cash introduced into the business)

Capital A/c      Dr        Amt (Debited as capital is reduced)

To Cash A/c                      Amt

(Being cash withdrawn from business)

Profit and loss A/c       Dr      Amt

To Capital A/c                        Amt  (Capital is increased, so credited)

(Being profit transferred to capital account)

That’s it! I would conclude my answer.

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