Normally when a business issues equity it does so in return for a cash capital injection. However, it is often the case, particularly with a start up business, that there will be a non-cash capital introduction in which the business will issue equity in return for non-cash assets such as property, plant, and equipment or supplies and inventory.
Suppose an investor provides equipment with a fair value of 2,000 to the business in return for equity. The non-cash capital introduction transaction is shown in the accounting records with the following bookkeeping entries:
Journal Entry for the Non-Cash Capital Introduction
| Account | Debit | Credit |
|---|---|---|
| Equipment | 2,000 | |
| Capital | 2,000 | |
| Total | 2,000 | 2,000 |
Non-Cash Capital Introduction Bookkeeping Entries Explained
Debit – What came into the business
The business received an asset in the form of the equipment with a fair value of 2,000.
Credit – What went out of the business
The 2,000 capital represents the investors 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 (equipment) 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 and has built financial models for 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 degree from Loughborough University.