Here is an example of how your profits (net income) and capital accounts interrelate - If you are one of two 50/50 owners of XYZ & Co. LLC and you contribute $10,000 to help start the LLC, your initial capital account balance is $10,000. If you take a $2,000 owner draw, your capital account balance decreases to $8,000. If at the end of the first fiscal year, the LLC has $10,000 in profit, the LLC adds $5,000 to your capital account to reflect your share of the profits, and your capital account balance is $13,000.
When you contribute assets (cash, equip, etc) to the business, your capital account goes up and when you distribute or draw assets, the capital account decreases. The accounting equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities plus the owners' equity of the business.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
