What is the Difference between a Capital Account and a Income account?

Question

My husband and I want to open a small buisness but We have to write up a business agreement. we dont understand these terms.

Please be discriptive and DO NOT point us to another website. If you can't give all the information here please donot try to answer. Thank you

Answer 1

The following explanation will make any  accountant shudder because it is too simplistic.

A capital account has to do with your investment in the business.    

An income account has to do with the profits your business earns during an accounting period.

Profits (and losses) from the Income accounts are transferred to Retained Earnings or Owner's Equity (both capital accounts) at the end of each accounting period (usually a month).  

During the accounting period money and the value of any goods taken out of the business by the proprietor are credited to a Drawing Account

and at the end of the period the amount in the Drawing Account is used to reduce the Owner's Equity in the business.

Please get a basic accounting book and devote some time to it before you open your business.  Understanding basic accounting will not guarantee your success, but not understanding basic accounting is almost certain to eventually lead to a lack of profits..

Hope this helps

Jerry-the-bookkeeper