Journal Entry for Capital Contribution
Capital contribution is the process that shareholders or business owner invests cash or asset into the company. The company needs cash to start the operation as it may not be able to generate profit to support is itself. The business owner needs to invest some cash to allow the business to start. The cash is called business capital that will be present in the balance sheet under share equity section.
Capital is very important for the business to start its operation. They expect that company will be able to generate profit to support its own operation. However, it may not go as planned, the company cannot generate enough profit to support operation. So it needs additional cash to operation otherwise it must be liquidated. Sometimes the company is making a profit, but it does not have enough cash to pay for suppliers, employees, and other parties.
Moreover, the current owner may not be able to contribute enough cash to the company. So they look for new partners to contribute to the business. New partners need to purchase the share from the existing owner as the share are not traded in the capital market. Later on, when the company needs more capital, all partners need to contribute based on their ownership percentage.
Capital contribution is the cash that shareholders invest as equity, so it is not guaranteed to get back from the company. They can take it back in form of dividend or drawing which only happen if the company perform well. The owners will face the risk of losing all the money if the company goes bankrupt.
It is the opposite of a loan which company must pay back base on terms and conditions. So some shareholders decided to provide loans to company instead of capital contributions. Accountants must be aware of the accounting treatment regardless of shareholders’ cash put into the company. It can be different due to the term and conditions of cash invested.
Capital Contribution Journal Entry – Cash
When the owner invests additional capital into the company, we need to record additional share capital and cash invested. The company will be able to use the cash to pay for suppliers, employee,s and other parties.
The company needs to make journal entries by debiting fixed assets or cash and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Share Capital | 000 |
Both accounts will impact the balance sheet. Cash will be classified as a current asset in the balance sheet. The share capital will be recorded in the equity section of the balance sheet.
Capital Contribution Journal Entry – Other Assets
Besides cash, the owner can invest other assets such as buildings, equipment, vehicle, and other assets instead. If the owner invests in fixed assets, we need to define the fair value which needs to record in the financial statements. Fixed assets are different from cash, so we need to find the appropriate value to record. So it will present true and fair on the balance sheet.
The company needs to make journal entry by debiting fixed assets and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | 000 | |
| Share Capital | 000 |
Fixed assets will be recorded based on the fair value. It will be treated as normally fixed assets and calculate depreciation expense. The share capital will be present in the balance sheet under the equity section.
Capital Contribution Journal Entry Example
Mr. A is the only owner of company ABC which start the operation one year ago. Due to operation loss, company does not have enough money to pay for a supplier, so Mr. A invests an additional $ 50,000 on 01 March 202X.
On June 202X, Mr. A also contribute his new car to the company. He just bought this car a week ago at $ 40,000, but due to the company needs, he decides to transfer the car ownership to the company and treat it as his capital investment.
Cash investments:
After receiving cash from Mr. A, the company needs to record debit cash and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Share Capital | 000 |
After recording this transaction, they can use the cash to pay for business operating as normal. Capital will maintain on balance sheet unless owner decides to withdraw or change the capital structure.
Car investment:
As the car is newly purchased, we can use the purchase price which is considered as fair value. We will recognize the car value of $ 40,000 into the balance sheet. The company makes journal entry by debiting fixed assets (car) and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets – Vehicle | 40,000 | |
| Share Capital | 40,000 |
After recording this transaction, the company needs to start depreciating the car based on the fixed assets policy.
Additional paid-in capital vs Capital Contribution
Additional paid-in capital is the amount that an investor paid to purchase company’s share which is over the common share par value. It will happen only when the company issues new shares that are called IPO (Initial Public Offering). Any change in share price after the IPO will not impact the company’s additional paid-in capital.
Additional paid-in capital only has in the listed company whose shares are publicly traded in the capital market. The investors need to pay money directly to company to acquire shares during IPO. This amount of money will be split into two parts which are common share capital and additional paid-in capital. Both items are present in the equity section on balance sheet.
Contribution is the total amount of cash that owner invests into the business. The money may come from existing or new shareholder. It is mostly happening in private or partnership company which the shares are not publicly traded. All the money the owner invests into the company will record in capital contribution.
Conclusion
These are the journal entry that uses for sole priorship which is straightforward. We try to simplify the transaction which is easy to understand. For big corporations that issue shares to the capital market, the transactions are more complete. We recommend you read the article related to accounting for common stock.