Here's one of the best word smithing I've seen on this:
Capital accounts are generally created by partnership agreement and help determine a partners rights to the money and property
of the partnership and often measure what a partner has put into a partnership. Because capital accounts help determine amounts that a partner is entitled to receive upon a sale or liquidation, it is important to ensure the following points:
Capital accounts, as opposed to basis, can be negative,
A partner's share of liabilities
is not reflected in the capital account. Upon initial contribution, assets
net of any liabilities will be reflected in the capital accounts.
Capital accounts do not always reflect the true value of a partners interest
. Fluctuations in fair market value are not usually reflected in the balances.
Capital accounts are a partnership accounting mechanism and not a tax mechanism.