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 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.
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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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.