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July 23, 2007

How do you record an owner’s money that is used to start a company?

If the owner of a sole proprietorship puts money into her or his business, the sole proprietorship will debit the asset received (Cash, Inventory, Equipment, etc.) and will credit the owner’s capital account (if it is an investment in the business) or will credit a liability account such as Notes Payable (if it is a loan to the business). The amount that is recorded is the cash amount. If cash was not involved, then the cash equivalent or fair market value is used.

If the business is a corporation and the owner’s infusion of cash is an investment, the account Common Stock is credited. (If the common stock has a par value, Paid-in Capital in Excess of Par is also used.) If the owner lends cash to the corporation, the liability account Notes Payable to Stockholder is credited. When the asset is not cash, the amount recorded is the cash equivalent or fair market value of the asset or the fair market value of the common stock issued, whichever is more clear.

You should consult with your accounting and tax professional about the pros and cons of investing versus lending.

Learn more about Stockholders’ Equity.




Comments

6 Responses to “How do you record an owner’s money that is used to start a company?”

  1. Tuyeni on March 4th, 2008 12:51 pm

    I actually enjoy your help, about knowing accounting more and more. Thank you and keep up the good job. please send more questions and answer on my email.

  2. jose Kumar d on May 26th, 2008 5:53 am

    he is more helpfull

  3. hyper on June 5th, 2008 8:32 am

    how do u rewcord a deposit for a service or a production yet to be concluded

  4. George on July 18th, 2008 12:07 pm

    What if at the end of the year after paying all expenses and recieving all payments, the company’s cash assests equal the amount invested by the owner? Is this amount taxable as a profit?

  5. Omkar on September 20th, 2008 3:04 pm

    Please explain the whole concept of accouting reserves in balance sheet and its total effects.

  6. Juan on June 29th, 2009 3:56 pm

    Please explain the whole concept of accouting reserves in balance sheet and its total effects

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