What is a capital account?

A capital account tracks each owner's equity in a partnership or LLC, reflecting initial contributions, allocated profits and losses, and distributions. For professional service firms structured as partnerships or multi-member LLCs, capital accounts determine ownership rights and distribution entitlements.

Key characteristics

• Tracks owner equity

• Reflects contributions and distributions

• Allocated profits increase it

• Distributions decrease it

• Different from tax basis

• Required for partnerships

Why it matters for professional service firms

Capital accounts determine each owner's share of equity and guide distributions. Accurate tracking prevents disputes and ensures proper allocation. Professional service firms with multiple owners must maintain capital accounts reflecting each owner's equity position.

Real-world example

Chris and his partner started an LLC with $50,000 each in capital (capital accounts: $50,000 each). Year one: $200,000 profit allocated 50/50, each capital account increased to $150,000. Distributions of $80,000 each reduced capital accounts to $70,000 each. Capital accounts reflected each partner's true equity position.