Teachers Network
Balance Sheets

Owners' Capital


The third section of the balance sheet is a bit like liabilities - it represents money that does not really belong to the business.

The difference is that the capital section represents money to which the owners of the business have a claim. It is not directly owed to them in the same way that liabilities are owed to banks, creditors, etc. It's a subtle difference.

Capital = Assets - Liabilities

In other words, once a business has paid all its debts, anything left over belongs to the owners.


This represents the money that shareholders or owners invested in the business. Some managers prefer to finance their activities using capital rather than by loans as they do not have to face interest charges. The downside, of course, is that they will have to pay profit to owners (dividends to shareholders or drawings to sole traders/partnerships).

Retained Profit & Reserves

This is the value of profit made in the past and kept by the business. Remember that profit is a reward for taking risks and it ultimately belongs to the owners of the business. The managers may decide to pay it to the owners or they may decide to use it as retained profit for financing some expansion. They will probably pay some of it to the owners or they might find themselves voted out of their jobs.

The value of the profit made in the year (if any was made) is calculated on the profit & loss account.

Concepts | Assets | Liabilities | Capital | Ratios | Challenges