Commencement of business or introduction of capital into the business by the proprietor:

Commencement of business or introduction of capital into the business by the proprietor:

     Generally, a businessman commences business with cash. But, sometimes, he may commence business with cash as well as other assets, or with assets as well as liabilities, or only with borrowed money (i.e., only with liabilities). So, it is better to know the journal entry to be passed or introduction of capital by the proprietor under the various circumstances.
     Let us consider this point with some examples or illustrations.

Illustration 1.

     Gopalkrishna commenced business with cash Rs.5,000.

(Or)

     Gopalkrishna started business with Rs.5,000.

(Or)

     Cash brought in by Gopalkrishna as capital Rs.5,000.

(Or)

     Gopalkrishna introduced into the business Rs.5,000.

(Or)

     Gopalkrishna introduced into the business a capital of Rs.5,000.

(Or)

      Gopalkrishna started business with a capital of Rs.5,000.

(Or)

      Gopalkrishna invested in the business Rs.5,000.

(Or)

      Gopalkrishna started business with an investment of Rs.5,000.

(Or)

     Received from Gopalkrishna, the proprietor, Rs.5,000.

     Pass the journal entry.

Note:  Each of the above transactions means that the proprietor brings into the business cash of Rs.5,000 as capital. So, the two accounts involved in each of the transactions are (a)  Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business. The journal entry for each of these transactions will be

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               5,000.     

                   To Capital Account.                        5,000

                 (Being the cash 

                   introduced into the

                   business by the 

                   proprietor as capital)

Illustration 2.

     Samson commenced business with Rs.10,000 received from his father-in-law as presents. Pass the journal entry.

Note: This transaction means that the proprietor has brought into the business as capital the cash of Rs.10,000 received by him from his father-in-law as presents. In short, this transaction means that the proprietor brought into the business cash of Rs.10,000 as capital. So, the two accounts in this transaction are (a) Cash Account and (b) Capital Account. Cash Account should be debited, as it comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business.

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               10,000.     

                   To Capital Account.                        10,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 3.

     Manon invested in the business the sale proceeds of his ancestral house Rs.50,000. Pass the journal entry.

      The sale proceeds of ancestral house invested in the business by Manon should be regarded as cash introduced in the business by Manon, the proprietor, as capital. So, the two accounts involved in this transaction are (a)  Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business.

The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               50,000.     

                   To Capital Account.                        50,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 4.

     

     Bandanna introduced into the business his private income of Rs.2,000. Pass the journal entry.

Note: The private income introduced into business by Bandanna should be treated as cash introduced into the business by Bandanna, the proprietor, as capital. So, the two accounts involved in this transaction are (a) Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business. 

The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                       Rs.        Rs.

                  Cash Account.    Dr.               2,000.     

                   To Capital Account.                        2,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 5.

     Menon commenced business with Rs.8,000 in the bank. Pass the journal entry.

Note: This transaction means that the proprietor deposited Rs.8,000 into the bank account of the business as capital. In other words, it means that the banker of the business received Rs.8,000 from the proprietor as capital. So, the two accounts involved in this transaction are (a) Bank Account and (b) Capital Account. Bank Account should be debited as the bank is the receiver of benefit. Capital Account should be credited, as the proprietor is the giver of benefit.

The journal entry will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Bank Account.    Dr.               8,000.     

                   To Capital Account.                        8,000

                (Being the amount

                 deposited into the

                 Bank by the

                 proprietor as

                 capital)

Illustration 6.

     Iyengar commenced business with cash in hanRs.1,500 and cash at bank Rs.3,500. pass the journal entry.

Note:  This transaction means that the proprietor brought into the business cash of Rs.1,500 and deposited into the bank account of the business Rs.3,500 as capital. In other words, this transaction means that the business received cash of Rs.1,500 and the banker of business received Rs.3,500 from the proprietor as capital. So the accounts involved in this transaction are (a) Cash Account and Bank Account and (b) Capital Account. Cash Account should be debited as cash comes into the business, and Bank Account should be debited, as the bank is the receiver of benefit. Capital Account should be credited, as the proprietor is the giver of benefit. So, the journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                 Cash Account.    Dr.               1,500
                 Bank Account.    Dr.               3,500.     

                   To Capital Account.                        15,000

                (Being the 
                   commencement

                   of business by the

                    proprietor with                                                                  cash in hand and
                    Cash at bank)

  Illustration 7.

     Away started business with Rs.15,000, out of which Rs.6,000 was paid into bank. Pass the journal entry.

Note: This transaction can be treated in two ways. They are :

     1. This transaction can be taken to mean that the proprietor brought into the business cash of Rs.9,000 and deposited Rs.6,000 into the bank account of the business.

     2. Alternatively, this transaction can be split into two separate transactions taking place on the same date. They are (a) the proprietor brought into the business cash of Rs.15,000, and (b) the business deposited cash of Rs.6,000 into the bank. So, the journal entry or the journal entries for this transaction will be:

     Under the first method, only one journal entry has to be passed. The journal entry will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                 Cash Account.    Dr.               9,000
                 Bank Account.    Dr.               6,000☺️.     

                   To Capital Account.                        15,000

                (Being the 
                   commencement

                   of business by the

                    proprietor with                                                                  cash in hand and
                    Cash at bank)

     Under the second method, two journal entries have to be passed, viz., one entry for the cash of Rs.15,000 brought into the business by the proprietor, and the other entry for deposit of cash for Rs.6,000 into the bank. The two journal entries will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

    1.         Cash Account.    Dr.               15,000    

                   To Capital Account.                        15,000

                (Being the cash
                   introduced into 

                   the business by the

                    proprietor as 
                    capital)

    2.        Bank Account. Dr.                 6,000
                 To Cash Account.                               6,000
               (Being the cash 
                deposited into
                bank).