Definition of Capital Accounts on a Balance Sheet

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A company's capital account doesn't just show how much money the business has at a given point. It also demonstrates top leadership's ability to assuage the concerns of external financiers, as well as the amount of cash they have already poured into the organization. Capital accounts are integral to a balance sheet.

Definition

  • A capital account is integral to a statement of financial condition and a company's statement of equity. This report is also known as a report on shareholders' capital or statement of retained earnings. Capital accounts run the gamut from common stocks and preferred shares to treasury stock, dividend payments and retained earnings. In essence, equity accounts pertain to any financial item affecting an organization's equity capital. Treasury stocks come from share repurchases and generally reduce stockholders' capital -- similar to dividends. Common stock, preferred shares and retained earnings increase equity capital.

Significance

  • An organization's capital accounts reflect the confidence that external financiers have with respect to its commercial potential. If investors don't think much of the company in terms of profit potential, equity accounts show low balances. If the business is on a solid path toward economic success, corporate treasurers periodically might rip open investor-sealed envelopes containing large check amounts. Generally speaking, capital accounts tell financial statement readers how a company's leadership is using investor money as well as the cash that preferred and common stockholders poured into the business.

Occupational Impact

  • Capital accounts indirectly impact the way a business goes about formulating and implementing its commercial strategy. As capital account holders, investors own the company and, therefore, wield substantial clout in setting the tone at the top. For example, stockholders might vote against management's proposal to expand in a foreign market or might lend a defensive tone to the way top leadership is managing company money and monitoring the work of personnel. Equity holders can vote to appoint the cadre of senior officers who run a business, including the chief executive officer and corporate directors.

Costs

  • A publicly traded company spends money to raise funds on financial markets, set proper record-keeping procedures for equity-related transactions, and report capital accounts in accordance with generally accepted accounting principles and international financial reporting standards. Fundraising expenses relate to money the business pays investment bankers and other specialists who help it issue stocks on securities exchanges, such as the New York Stock Exchange. The company also makes outlays to maintain an up-to-date shareholder register and establish an effective investor relations department. Other costs include cash paid for regulatory filings with the U.S. Securities and Exchange Commission, as well as periodic financial statement presentations.

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