Journal Entry Question: Complex Capital Investment
by Rezaul Hasan
Q: What is the journal entry for the following transaction:
Mr. A starts his business by bringing $1000 cash, accounts receivable $500, furniture $1000 and accounts payable $1000.
A: Where an individual (an owner) invests in a business we have capital. Where we have an investment that is not a simple cash investment, we call this a complex capital investment.
The entry for this is not so difficult if you understand debits and credits and where your assets go (and liabilities too where this is brought into the business).
Here is the composite entry (a composite entry is a journal entry where you have more than one debit or credit in the same entry):
Debit Bank $1,000 Debit Accounts Receivable $500 Debit Furniture $1,000 Credit Accounts Payable $1,000 Credit Capital $1,500
The $1,500 figure for capital above is calculated as the net amount after taking the value of all assets and deducting the liabilities ($1,000 + $500 + $1,000 - $1,000 = $1,500).
By the way, you may have wondered about the accounts payable - how can someone invest accounts payable into a business? This sort of situation can exist where the owner already had a business with assets and liabilities and is buying another business (combining the two businesses). The owner is bring over his old accounts payable (liabilities) into the new business.
Hope that makes sense! Good luck!
Best, Michael Celender
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