What is a capital account?

A partnership keeps a capital account for each partner, and the US partnership tax return reports it on each Schedule K-1: the beginning balance, capital contributed, the year’s net income or loss, withdrawals and distributions, and the ending balance. The IRS asks for that figure on a tax basis, which can differ from the book figure in the fund’s own financial statements.

Say an investor starts the year with a $10 million capital account, contributes $2 million, is allocated $1 million of income and receives $3 million in distributions. It ends the year at $10 million. Simple example. Terms vary by fund.

It is the figure behind each investor’s statement and the fund’s waterfall, so an error in it changes what an investor is owed.