Started Business with Cash Journal Entry

Started Business with Cash Journal entry is probably the initial accounting transaction.

Any Entity needs Capital to achieve its primary business objective.

Owners bring Capital into the business through

• Equity Shares,
• Preference Shares,
• Capital from the Partners (if the entity is a partnership firm), or
• Debt/Financings from borrowers. 

We will learn some basic concepts before moving on to the main topic – “Started Business with Cash Journal Entry.”

Estimated reading time: 6 minutes

What do you mean by Capital?

Capital is Cash Paid to an entity against Shares or Interest in the business.

The interest here means the direct or indirect right to participate in the day-to-day operations.

For Partnership firms, it’s a direct right.

However, if the entity is a corporate body, the shareholders can become members of the board of directors and engage in business operations.

Interest payments can be made to the partners and dividends to the shareholders for capital contributions.

Partners can bring in Capital in the form of Cash or Assets (this applies only to partnership firms). For example, ABC is a Partnership firm with three partners: A, B, and C.

Partner A brought in Capital in the form of $10,000 in Cash and $50,000 in Furniture. Then, we need to record the assets and cash as debits along with a corresponding credit to partner A Capital. 

Let’s see the Capital entry in :

Started business with Cash Journal entry:

Now that we understand Capital well, we can move on to the main topic of “Started business with a Cash Journal entry.“

The focus here is on starting a business with a capital contribution in the form of cash. The journal entry to record the cash brought in to commence a company is below.

How is the above entry recorded?

We record entries as per the Golden Rules of Accounting. These rules define the foundational step of deciding whether to debit or credit a GL Account in the journal entry. Such rules categorized GL accounts into three, and those are below:

Personal Account

GL Accounts related to Natural Persons (like Ram, Suresh), Artificial Persons (like LLP, Company), and Representative Persons like Capital Accounts, Drawings Accounts, etc., fall into the Personal Account Category.

Rule: Receiver and Giver will be debited and credited, respectively.

Also Read: True Up Journal Entry

Real Account

GL Accounts of an asset nature, like Cash, Furniture, etc., fall into Real accounts.

Rule: Debit What Comes in and Credit what goes out

Nominal Account

All Incomes/gains or Expenses/losses fall under this category. However, our transaction does not include any nominal accounts. 

Analysis of the Started business with Cash Journal entry

We will understand how to identify each GL that is part of the transaction and then apply the golden accounting rules. The two accounts in this transaction are cash and Capital. 

Cash is a real account and is coming into the business. As such, we will debit it in the journal entry.

Capital is a Personal account and a giver to the business. Therefore, we will credit it in the journal entry. These are the steps that need to be followed to record any entry.

Examples for Started Business with Cash Journal Entry

1. Ramesh started a business with cash. What’s the Journal entry?

The transaction results in two GL Cash and Capital accounts. The journal entry to record this transaction is the same as the above. However, the Capital GL accounts shall be clearly described. Instead of recording it as just a Capital Account, we can record it as Ramesh Capital. This helps distinguish the records of each partner if there is more than one partner.

2. Journal entry for commenced business with cash by Suresh

Commencement of business is nothing but starting a business. The entry will be the same as in the above example, but the GL Description varies.

Have you wondered why the business started with cash journal entries to be recorded?

Sometimes the answer to a question will be asking a different question.

In other words, for what reasons can we justify not recording this transaction?

The purpose of accounting is to keep a record of all financial transactions. This bookkeeping helps to maintain a true picture of financial affairs.

Frequently Asked Questions:

What is the entry for cash invested to start the business?

We will record the entry by debiting cash and crediting capital accounts.

How do you record the beginning cash balance?

Personal and real accounts will not close in a year and will have a running balance. So, we will carry forward the assets and liabilities GL accounts to the following year. We need to bring in the cash balance from the previous year. Nowadays, the accounting packages have a feature to automatically bring those balances into the current year. 

We need to debit the Cash GL as the inflow of funds increases its balance.

Also Read: Cash Coverage Ratio

Which are the two accounts involved in the transaction that started business with cash?

Cash and capital accounts are two GLs part of this ‘started the business with cash’ transaction.

For example, let’s take a scenario in which Ram started the business with a cash journal entry by borrowing $12,000 from his friend Dave.

Cash GL is very evident from the transaction description.

The other GL will be either Debt from financiers or Capital from the owners. So, the asset cash comes in with a combination of either capital or debt. That’s the only possibility when commencing a business.

What journal entry does a company make to record a cash investment by the owner in exchange for common stock?

Cash investment by the owner in exchange for the common stock has two GLs—cash GL and Equity share capital GL if it’s a Company or Capital GL in the case of a partnership firm.

Debit the cash and Credit the Equity Share Capital accounts.

Will there be any difference for Preference Share Capital Accounts?

The answer is no.

Shareholders are the owners of the business, so they stand last in terms of receiving back the investments. So, the Nature of capital differs, but not the accounting.

Conclusion

The business started with cash journal entry records of the initial Capital brought into the business. We will record it by debiting the cash against credit to the capital account. Per Golden Accounting rules, we will debit the cash as it comes into the business and credit the Capital GL as it is the giver.

Recommended Articles

• Interest on Drawings JE
• Outstanding Expenses Journal Entry
• Accrued Audit Fees
• JE for Goods Lost