How Do We Record Contributed Capital?
In recording the transactions below, let us remember that an individual account has two sides: left and right. Assets are normally placed at the left side and capital or equity accounts are posted on the right side.
In a single proprietorship where the records are simpler than the other two entities, the owner’s contributed capital is his investment. Client Mr. Roxas, for example, has the following assets as investment in a laundry shop:
- Cash: $50,000
- Furniture and fixtures: $60,000
To record the above investment, Cash is placed at its left side, with the corresponding amount of $50,000. Furniture and Fixtures, also an asset, is also recorded at its left side with the corresponding amount of $60,000. Mr. Roxas, Capital is recorded at its right side with a corresponding amount of $110,000 ($50,000 and $60,000 added together). In this transaction, the total contributed capital of Mr. Roxas is $110,000, or the amount equivalent to what is credited or posted at the right of the Mr. Roxas, Capital account.
If the business is a partnership, the contributed capital is equal to the actual contributions of the partners.
In Roxy and Jade Partnership, another client of Carlson, for example, Partner Roxy puts in $40,000 Cash, and Partner Jade puts in $50,000 worth of Merchandise Inventory.
In recording the above transaction, the asset Cash has a corresponding amount of $40,000 posted at its left side. The other asset, Merchandise Inventory, is also recorded with the amount of $50,000 at its left side. Roxy, Capital account and Jade, Capital account are created with the corresponding amounts of $40,000 and $50,000, respectively, and are posted at their respective right sides.
Capital contributed by shareholders comes from the sale of shares of stock. The shares of stock issued are generally referred to as share capital. Legal capital is that portion of the contributed capital, or the minimum amount of paid-in capital, which must remain in the corporation for the protection of corporate creditors. Shares may either be recorded with a par value, or without a par value. A par value is a specific amount that is fixed in the articles of incorporation and appearing on the certificate of stock. It is also the minimum issue price of the shares.