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Understand the Details Associated with This Subject Capital Account

by Apr 18, 2018Homework Answers

As a company grows in terms of profit, sales or human resources the need to cater to this growth is reflected by an increase in the scale of operations, administration, marketing and primarily increase in the financial transactions undertaken by the company. The financial transactions of an organization are the physical proof of the growth and prosperity of the organization. As the transactions increase the organization’s reliance on financial accounting multiplies proportionately. With capital account homework answers you can get complete details of this subject.
Getting to the details of this subject:
What is a financial accounting?
The term Financial Accounting refers to the task of recording, processing and presenting the financial transactions of an organization as per the prevalent accounting standards. It is through the process of financial accounting that the financial statements of an organization are compiled and presented to the authorities concerned.
Financial Accounting is performed in two ways or in a combination of the two ways:

  • Accrual Method

In the Accrual Method, transactions are recorded as they occur and when their realization is imminent. The transaction is recorded even though cash or cash equivalents have not been exchanged.

  • Cash Method

In the Cash Method, transactions are recorded only if cash has been exchanged, or the realization of cash is assured, and hence revenue can be recognized.
What are the various general ledger accounts?
When we use the term General Ledger Accounts, we refer to the summary of general ledgers that are used to record the transactions of the Balance Sheet as well as of the other Financial Statements. They can be listed as follows:

  • Capital Accounts
  • Inventory
  • Land and Equipment
  • Cash and Cash Equivalents

What do we understand by capital account homework answers?
When we use the term Capital Account we refer to the general ledger account which is used to record the following:

  • The total amount of cash or cash equivalents that the Investors have invested in a particular organization.
  • The earnings or revenue of the organization that has been retained by the organization after the payment of dividends and taxes.

What capital accounts homework answers are maintained by organizations?
In Sole Proprietorship, the following capital account homework answers are maintained to facilitate easy handling of financial transactions:

  • Owner’s Capital Account

Being a sole proprietorship, the owner’s equity in the proprietorship is represented by the Owner’s Capital Account. It comprises of the initial investment of the owner and then the subsequent earnings and revenue.

  • Owner’s Drawing Account

The amount withdrawn by the Owner is recorded by the means of the drawing account. It has a debit balance with at the end of the financial year is transferred to the Owner’s Capital Account.
In case of Partnership Firms, the capitals of the partners are maintained under 2 methods:

  • Fixed Capital

Under this method, the capital of the partners is divided into two accounts- the Capital Account and the Current Account. The Capital Account contains the opening balance of the partners, and the Current Account contains the various transactions of the partners in a particular financial year.

  • Fluctuating Capital

In the fluctuating capital method, there is only one account- the various Partners’ Account in which all the transactions are recorded.
In case of Corporations and Business houses, the following capital account homework answers are maintained to enable the recording and presentation of the various transactions:

  • Share Capital

The Capital Account of a Corporation represents the equity of the owners and the Investors or Shareholders of the Corporation. The Capital of the Corporation is divided into parts of equal monetary value which are called shares. These shares are bought by the Owners or Investors to facilitate the growth of the Capital of the organization.

  • Retained Earnings

The Retained Earnings of an organization refers to the amount of the revenue generated in a financial year which was left after the payment of various dividends and taxes.

  • Reserves and Surplus

The Reserves and Surplus of an organization refer to the various general ledger accounts like General Reserve, Capital Reserve, Redemption Reserve, and Reserve Capital among other.
What are the various components of capital account homework answers?
There are 4 major components of the capital account which have been listed as follows:

  • Investments

The Capital Accounts opening balance consists of the initial investment of the Owners or Investors. The Investors who buy the shares of the organization are rewarded by means of dividends paid by the organization on a timely basis.

  • Withdrawals

The withdrawals made by the owners or the investors from the capital account homework answers in the form of payment of dividends and interest comprise of the withdrawals.

  • Income

The income earned by the organization in the form of sales, revenue or interest when retained or sent back by the organization into the daily operations of the organization becomes a part of the Capital Account. They represent the economic benefits earned for the implementation of various activities and tasks.

  • Expenses

The expense undertaken by the organization to keep the activities in constant running is also a part of the Capital Accounts. Examples of such expenses are procurement of raw materials, purchase, and repair of machinery, payment of salaries and wages, etc.
What are the divisions of a capital account?
The Capital Account of an Organization can be divided into two parts – fixed capital and working capital. They have been described in detail below:

  • Fixed Capital

The term Fixed Capital can be used interchangeable for the term Fixed Assets. The Fixed Assets of an organization are the initial investment for its establishment. They include those assets which give economic benefits for a long period of time; they are not meant for sale but for the use in the production of the essential goods and services of the organization which keeps it afloat.
The investment in the purchase or acquisition of long term or non-current assets comprises of the Fixed Capital of the organization. The various types of fixed assets are Goodwill, Patents, Trademarks, Land and Machinery.

  • Working Capital

The Working Capital of an organization represents the short-term liquidity for a particular financial year. It can be calculated by the excess of current assets over the current liabilities. Current Assets can be segregated into Debtors, Short term Advances, Stock, etc.
While Current Liabilities can be under the heads of Creditors, Short term Provisions, etc. The formula for calculation of Working Capital = Current Assets – Current Liabilities.
The need for capital account
In a Balance Sheet, capital account is listed under the head of the Equity and Liabilities. They are required for:

  • Tracking the contribution

The breakdown of the Capital Account of an organization helps to identify the various shareholders and owners along with a number of their contributions to the organization.

  • Easy payment of Dividend

The proper identification of the various shareholders facilitates the easy payment of dividend to each of them in accordance with their respective shareholding patterns.

  • Establishing the Financial Position

The Capital Account of an organization helps to establish the financial position of the organization through the means of various liquidity, efficiency and profitability ratios.

  • Profit sharing ratio

In case of Partnership firms, the balances of each Partner’s Capital help to identify the proportion in which they share their profits and gains.