Capital account (sole trader) format

The standard format

1. Opening capital brought forward
2. Add: profit for the year
3. Add: capital introduced
4. Less: drawings
5. Closing capital carried down

Filled example

Notes

• Profit increases capital; a loss reduces it.
• Drawings are deducted from capital, never treated as an expense.
• Closing capital appears in the statement of financial position.

Building and reading this format

A sole trader's capital account shows the owner's stake in the business and how it changes over the year. It starts with what was there at the beginning and ends with what remains. It reads like a short story of ownership.

Start with opening capital, the balance brought forward from the end of last year. Suppose the owner began the year with RM50,000. Add any extra capital the owner introduced, whether cash or a personal asset such as a vehicle.

If the owner paid in a further RM10,000 in cash, the account grows by that amount. Next add the profit for the year from the income statement. Profit belongs to the owner and increases their claim.

If the business earned RM22,000, capital rises by RM22,000. If the business made a loss, deduct it instead.

Then subtract drawings, the cash and goods the owner took for private use. If drawings were RM18,000, the account falls by that amount. Profit is credited first and drawings are set against the enlarged balance, so the account shows whether the owner took out more or less than they earned.

The result is closing capital, carried forward to next year. With the figures above: 50,000 + 10,000 + 22,000 − 18,000 = RM64,000. This must be the capital shown in the statement of financial position, where it balances against net assets.

The account and the statement are two views of the same stake.

The account also shows how the owner treats the business. If drawings exceed profit, closing capital falls below the opening figure. The owner is living off the business's substance, not its earnings.

If profit comfortably exceeds drawings, capital grows. A large amount of new capital may hint at cash problems.

Marks are mostly lost on drawings. Drawings must be deducted from capital. Never add them, and never show them as an expense in the income statement, because taking money for private use is not a cost of running the business.

Adding a loss instead of subtracting it is another slip. Remember that goods taken by the owner count as drawings. Missing additional capital, or deducting drawings before adding profit, gives a closing figure that will not tie back to the statement of financial position.

Label the closing balance clearly so it can be matched to the statement.

If drawings, loss and extra capital leave you unsure of the order, we can help. One of our teachers can work through a few capital accounts with you. They will show how each one ties to the statement of financial position. Book a trial class

Related how-to

• How to prepare a statement of financial position
• How to record goods taken for own use

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.