Journal Entry for Capital Introduced
Capital is the amount of assets that owner invests into the company. It represents the amount of cash, machinery, equipment and other assets that the owner injects into the company. In the beginning, the owner needs to introduce the capital into the company and it will provide enough assets to operate the business.
In a private company, all the capital belongs to one owner or a group of owners. The owners invest cash or other assets in the company to operate the business. When the owner invests cash, it allows the company to use cash to pay for employees, suppliers, and other parties. When the owner invests other types of assets, the company will start to use and depreciate the fixed assets.
The company can raise capital by increasing the equity or liability. Equity is the capital that company receives from its owner in exchange for company ownership. The owner will risk their money when the company does not perform well. On the other hand, if the company generate good profit, the owner will receive benefit based on the ownership percentage.
If the company receives capital by raising debt, it will increase the liability on the balance sheet. The company is able to use cash from debt, and they have obligation to pay back to creditors. They have obligation to pay back even they are not making a good profit. The creditors will not face a huge risk if compare to share equity. On the other hand, when the company has good profit, they still pay the interest based on the agreed rate.
The cash that invests by a person can be treated as debt or equity depending on the term and condition of the fund. If the people are willing to face a high risk
Journal Entry for Capital Introduced
When the company introduces the capital, it will record increased assets. At the same time, it will increase share capital on balance sheet. The assets will depend on the type of investment made by the owner.
The journal entry is debiting assets and credit share capital.
| Account | Debit | Credit |
| Assets | XXXX | |
| Capital | XXXX |
The transaction will increase the balance of the assets depending on the type of invested assets. The capital will increase on the balance sheet.
Journal Entry for Capital Introduced Example
Mr. A start-up a business on 01 August. In the beginning, he invest cash at bank $ 100,000 and a building worth $ 200,000 based on the valuation. Please prepare a journal entry for the capital introduce.
It is the capital introduce that company needs to make before operating. The company needs cash to pay for any other expenses.
The journal entry is debiting cash at the bank $ 100,000, building $ 200,000, and credit capital $ 300,000.
| Account | Debit | Credit |
| Cash at Bank | 100,000 | |
| Building | 200,000 | |
| Capital | 300,000 |
The transaction will increase the capital which is the equity on balance sheet. Cash and Building will increase as well.
The company needs to start to use the building and start depreciating it. Moreover, ABC also is able to use the cash to start the business. They will not be able to pay the cash when there is no cash in the bank.
