Owner Contribution Journal Entry

Owner contribution is the process by which business owners invest additional capital into the company to support the operation.

Businesses need capital to start and continue the operation. Most of the capital come from the owner’s investment or loan from various parties. The capital from the owner will be recorded as the equity part on the company balance sheet. The capital that company receives from creditors will record as debt in the liability section.

The capital that company receives from the owner in form of equity will be classified as the equity on the company balance sheet. The company does not have the obligation to pay back the capital to the owner. The company has the obligation to maximize owners’ wealth by increasing the profit. The owner can get back the capital in terms of dividends or withdrawals. These returns will be vary based on the company’s performance.

On the other hand, the capital received from the loan will create the debt on the financial statement. The company has the obligation to pay back the capital to creditors such as banks. Besides the principle, the company also pays the interest base on the agreed term.

The public company can raise share capital by issuing common stock or preferred stock which is the equity item. If they want to raise the debt instrument, the company can issue bonds to raise cash. They have to pay back to the bondholders base on the term and conditions.

For the private company, they can raise more capital by asking for the owner’s contribution. They cannot just issue the share capital to the market. When owner contributes the cash or fixed assets, company has to record accordingly.

Owner Contribution Journal Entry

When the owner contributes the assets to the company, they have to analyze if it is the debt or equity. Most of the time, the owner contributes the assets as equity while it is a private company.

The owner contribution will increase the assets as well as the equity on company balance sheet. The equity items will be recorded as owner capital while the assets will be recorded based on the actual items.

Most of the time, owner contributes the cash to the company which allows the company to use the cash to pay for the expense. They need to record cash increases alongside owner capital. The journal entry is debiting cash and credit owner capital.

The owner can contribute the other assets such as fixed assets to the company. Instead of cash, the company has to record the fixed assets base on the fair value. The journal entry is debiting fixed assets and credit owner capital.

Example

Mr. A is the owner of one company. He owns 100% of the share. During the year, he has contributed the following:

• Mr. A contributes cash of $ 20,000 as the owner’s capital.
• Mr. A contributes a new car that cost $ 100,000 based on the market fair value.

Please prepare journal entry for owner contribution.

Mr. A is the only owner of the company. When he contributes cash as owner capital, they have to record cash and capital. The journal entry is debiting cash $ 20,000 and credit owner capital $ 20,000.

When he contributes the car to the company, they have to record fixed assets and owner capital. The journal entry is debiting fixed assets $ 100,000 and credit owner capital $ 100,000.