How do you record an owner's money that is used to start a company?
If the owner of a sole proprietorship puts money into her or his business, the sole proprietorship will debit the asset received (Cash, Inventory, Equipment, etc.) and will credit the owner's capital account (if it is an investment in the business) or will credit a liability account such as Notes Payable (if it is a loan to the business). The amount that is recorded is the cash amount. If cash was not involved, then the cash equivalent or fair market value is used.
If the business is a corporation and the owner's infusion of cash is an investment, the account Common Stock is credited. (If the common stock has a par value, Paid-in Capital in Excess of Par is also used.) If the owner lends cash to the corporation, the liability account Notes Payable to Stockholder is credited. When the asset is not cash, the amount recorded is the cash equivalent or fair market value of the asset or the fair market value of the common stock issued, whichever is more clear.
You should consult with your accounting and tax professional about the pros and cons of investing versus lending.
