How to debit and credit investments by owner? Investments made by the owner of a company increase its assets and the owner’s equity. In accounting, it means that an asset account is debited and the owner’s equity account is credited.
In this post and the other “how to debit and credit” tutorials, we will illustrate how to record transactions. For the basic accounting level, we will use the transactions of Frontier Advertising Company (FAC). For simplicity, we assume that FAC uses accounting period of one month. Three levels of transaction analysis will be illustrated (that is, the basic analysis, accounting equation analysis, and debit-credit analysis). Based on those analyses, we will show you how each transaction is entered to the general journal.
Index of how to debit and credit tutorial
What is the owner’s investment transaction?
In a sole proprietorship, the owner invests his/her personal assets when he/she decides to start a new business. The assets may take the form of cash, on hand or in the bank account, or other resources to be used in the business. For accounting purpose, the owner and his/her company are viewed as separate entities, and we will apply accounting for the owner’s investment transaction from the company’s perspective (the entity assumption).
How to debit and credit investment made by owner?
On January 1, S. Gomez (the owner) puts $10,000 cash in a new advertising company. The company is called Frontier Advertising Company (FAC).
Basic transaction analysis
The asset of FAC in the form of $10,000 Cash increases (becomes available), and the owner’s equity, S. Gomez, Capital, also increases $10,000.
Accounting equation analysis
The accounting equation can be used to show the economic effects of an accounting transaction. The total value of a company's assets must always equal the total value of its liabilities and its owners' equity.
In our illustration, the effects of cash receipt by the company and Gomez’s investment can be displayed in terms of the accounting equation as follows:
Debit-credit analysis
According to the debit-credit rule, the increase in assets is debited. The $10,000 invested by S. Gomez makes the cash available in FAC. From the accounting point of view, the Cash account is debited $10,000.
According to the debit-credit rule, the increase in owner's equity is credited. The investment made by S. Gomez increases her equity in FAC. From the accounting point of view, the S. Gomez, Capital is credited $10,000.
Journal entry
In a manual accounting system, the journal entry is written down in a general journal book. The general journal book consists of pages with several columns for date, account title, account code, reference, and debit and credit amounts. Periodically, a batch of the debits and credits of journal entries is posted to the relevant accounts in the general ledger.
In the next post, we will discuss how to debit and credit the purchase of assets.
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