Journal Entry for Capital Increase
Capital increase is the process of adding additional owner capital into the business.
The company needs capital to start a business. The owner started to invest the money to purchase the assets and pay the suppliers or other parties. In the beginning, the company will not be able to generate profit to support the operation. It will rely on the owner’s capital to support to purchase of the fixed assets, inventory, and pay for the expenses.
Company capital refers to the funds or assets that a company uses to generate income and sustain operations. This can come from a variety of sources, such as equity investments, loans, or debt issuance. The company’s capital structure will vary depending on its industry, size, and financial position.
For the listed company, they can issue additional share capital to raise more funds. This option is not available for a private company. They can only request the owners to increase share capital to continue running the company. It can be both share capital or a loan from the owner.
The increase of capital will impact the equity section of the company and the invested asset which is mostly cash. It is more preferred as the capital does not require payback and interest expense. It is opposite from the loan which the company requires to pay back the interest and principle.
The recording of capital contribution will impact both assets and equity section of balance sheet. The assets are highly likely to include cash, fixed assets, and so on. The journal entry will be reflected with the nature of assets contribute.
Journal Entry for Capital Increase
The company capital will be increased when the owner injects more capital into the company. The capital can form cash, fixed assets, and other assets. Most of the time, they will inject money as it is easy to support the company’s operation. After receiving capital from the owner, company has recorded new assets and increased owner capital. The journal entry is debiting assets and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Assets | $$$ | |
| Share Capital | $$$ |
The transaction will increase assets on the balance sheet and it depends on the type of assets such as cash at bank, fixed assets, and so on. The other side will impact the share capital which is the equity on balance sheet.
Most of the capital increase will be made in form of cash. The owner invests the cash into the company which allows it to use to support operation or purchase whatever they need. The journal entry is debiting cash and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Share Capital | $$$ |
The transaction will increase cash balance on the balance sheet and credit share capital under the equity section.
Besides of cash, the investor can contribute the fixed assets to the business. The investors can contribute the vehicle to the company. The company has to record fixed assets and credit share capital. The journal entry is debiting fixed assets and credit share capital.
| Account | Debit | Credit |
|---|---|---|
| Fixed Assets | $$$ | |
| Share Capital | $$$ |
Example
Mr. A is the owner of the company ABC which has been operating for several years. Due to the low profit, the company is facing financial difficulties. It requires more cash to continue the operation. Mr. A decides to invest cash of $ 10,000 as the share capital to support the company. Please prepare journal entry for capital increase.
Mr.A is the only owner of ABC company. He owned 100% of company shares. When the company faced financial difficulties, Mr. A increase the capital to support the company. ABC has to record cash of $ 10,000 and increase the share capital of the same amount.
| Account | Debit | Credit |
|---|---|---|
| Cash at bank | 10,000 | |
| Share Capital | 10,000 |