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What is the nature of capital accounts? Is it an asset or a liability?

Accounting & finance for Banking

JAIIB Exam Study Material: What is the nature of capital accounts? Is it an asset or a liability?

In financial accounting, the capital accounts are considered shareholders equity. They are neither assets nor liabilities.

When you first start a company, this is known as the initial capitalization. A bunch of cash from the owner(s) becomes the property of the company and that cash infusion represents the initial equity (as in shareholders' equity) of the company. Typically, this cash is used for working capital needs to support the expenses related to the pre-startup operations. Subsequent to this initial capitalization, more capital may be required as cash is burned up (but no revenues are present to take its place). This is known as additional paid in capital.

Anybody who says that capitalization is a liability has provided an incorrect answer.

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