This paper proposes and demonstrates an estimation scheme for Li-ion concentrations in both electrodes of a Li-ion battery cell. The well-known observability deficiencies in the two-electrode electrochemical models of Li-ion battery cells are first overcome by extending them with a thermal evolution model. Essentially, coupling of electrochemical–thermal dynamics emerging from the fact that the lithium concentrations contribute to the entropic heat generation is utilized to overcome the observability issue. Then, an estimation scheme comprised of a cascade of a sliding-mode observer and an unscented Kalman filter (UKF) is constructed that exploits the resulting structure of the coupled model. The approach gives new real-time estimation capabilities for two often-sought pieces of information about a battery cell: (1) estimation of cell-capacity and (2) tracking the capacity loss due to degradation mechanisms such as lithium plating. These capabilities are possible since the two-electrode model needs not be reduced further to a single-electrode model by adding Li conservation assumptions, which do not hold with long-term operation. Simulation studies are included for the validation of the proposed scheme. Effect of measurement noise and parametric uncertainties is also included in the simulation results to evaluate the performance of the proposed scheme.