Capital Introduction

When you start your business you need a capital introduction. Suppose for example you start by depositing 1,000 cash into a business bank account.

Journal Entry for the Capital Introduction

The capital introduction transaction is shown in the accounting records with the following bookkeeping entries:

Capital Introduction Journal Entry
Account Debit Credit
Cash 1,000
Capital 1,000
Total 1,000 1,000

Capital Introduction Bookkeeping Entries Explained

Debit – What came into the business
Cash was deposited into the business bank account with the introduction of capital.

Credit – What went out of the business
The 1,000 capital represents your investment in the business and indicates ownership and an entitlement to a share of the profits. The capital introduced, together with retained earnings, forms the owners equity of the business.

The Accounting Equation

The accounting equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Capital Introduction Accounting Equation
Assets = Liabilities + Owners Equity
Cash = None + Capital
1,000 = 0 + 1,000

In this case an asset (cash) has been increased by the debit entry, and an equity account (capital) is also increased by the corresponding credit entry.

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Capital Introduction November 6th, 2016Team

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