When business is started a capital is introduce in business which is generally done by the partners or owner of business in form of cash or other assets.
What is Capital Account:
The money which the owner invested in business is known as capital .
Capital can be in form of cash ,Goods ,furniture , or any asset invested in business by the owner of the business.
Capital is Liability by nature. Capital is internal liability for business Because owner is the person who invested money in business and at end of accounting year owner either will get profit or loss made by business.
Capital is also known as Owner equity.
As per accounting equation Assets = Capital + Liability.
It shows that capital is also liability but its internal liability of the firm.
How to make journal entry of Capital Account
Take an example
Started business with cash Rs 100000.
Here two accounts need to be open
Capital A/c personal Account by nature or its liability also.
Cash A/c which is real account by nature.Cash is Asset and we are owner or have legal right to use it in business.
Now as per accounting rule of personal account credit the giver and here owner is giving his money in business
Cash A/c is real account as per real Account Debit what comes in .Here cash is introduce in business.
Journal entry will be
|
Cash A/c Dr |
100000 |
|
To capital A/c |
100000 |
|
(Being business started with cash) |
|
|
Asset |
= |
Liabilities |
+ |
Capital |
|
|
|
Cash A/c |
100000 |
|
|
|
Capital |
100000 |
Started business with cash goods and furniture journal entry
Started business with Goods Rs 100000 .,Furniture 200000,Building Rs 1200000 and cash Rs 100000.
Business can either be started by other assets as describe in question such as goods ,furniture building etc.
Now in this case owner of the business started business with the above item then following accounts need to be open
Furniture A/c
Purchase A/c
Building A/c
Cash A/c
Capital A/c
Furniture and Building ,cash and purchase are real account and as per real account Dr what comes in and all these things are introduce in business by the owner in business.]
Capital A/c Capital is Personal Account and credit the giver and owner is giver in this case in business.
|
Cash A/c Dr |
100,000 |
|
Furniture A/c Dr. |
200,000 |
|
Building A/c Dr. |
1200,000 |
|
Purchase A/c Dr. |
100,000 |
|
To Capita A/c |
16,00000 |
|
(Being business started with cash) |
|
Accounting equation of capital introduction
|
Asset |
= |
Liabilities |
+ |
Capital |
|
||
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Cash A/c |
100000 |
|
|
|
|
|
|
|
Furniture a/c |
200000 |
|
|
|
|
Capital A/c |
1600000 |
|
Building A/c |
1200000 |
|
|
|
|
|
|
|
Purchase A/c |
100000 |
|
|
|
|
|
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Note: Owner and business are separate entities in accounting therefore accountants do the accounting of the business only.It has nothing to do with the personal transaction of the owner if the owner made any personal transaction from the business then it will be known as drawing.
Additional capital introduced in business journal entry
Some time further capital is introduce in business .A business started earlier need to introduce further capital to run it smoothly .
Example :
Additional capital introduce in business on 1 Jan 2021 Rs 50000 by cash.
Cash A/c Dr. | 50,000 |
To capital A/c | 50,000 |
(being additional capital introduce) |
|
Additional capital introduced by cheque Rs. 50,000
This transaction affects two accounts..capital account and bank a/c… where capital account and bank accounts are Real a/c
The three golden rules of accounting are
Personal account – Debit the receiver, credit the giver.
Real account – Debit what comes in credit ,what goes out
Nominal account – Debit all expenses and losses, credit all incomes and Gains
So money is paid for capital..so money goes out of bank / asset decreases.. then as Per 2nd golden rule ..it should be debited….
Similarly capital is increasing..(liability is increasing) so it should be credited to that extent..
So the Journal Entry will be
Bank A/c Dr. | 50,000 |
To capital A/c | 50,000 |
(being additional capital introduce) |
|
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