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Contributor

09/13/06 6:10am PDT

Starting a new business

Two situations:Sole Prop. started a business and opened checking account with $1000. I assumed this would be recorded as owner's investment equity. Prior to this, owner spent money out of personal funds to buy things for the business. Do I add those amounts to the equity account and then record those expenses? Should a check be written from the business account to reimburse the owner for business expenses purchased with personal money? If this is the case, owner would have to make more money to reimburse itself.Second situation:2 owner LLC Partnership:Owners decided to loan the partnership $5,000 each as money to start the business. How is this recorded?

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6 Replies

blrgcpa63

Contributor

04/09/06 6:23pm PDT

Sole Prop: The out of pocket expenses are recorded:

dr. expenses
cr. Owner's loan account

The loan account is considered a long term loan. It doesn't have to be paid back, but it can be drawn down. It should always have a credit balance. Otherwise the owner owes money to the business.

Within the equity, there is an owner's draw account. This is what he would take out of the business for living expenses.

LLC: the $10000 is capital

dr. Cash 10000
cr. Partner A Capital Contrib 5000
cr. Partner B Capital Contrib 5000

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yocos2001

Contributor

04/09/06 8:02pm PDT

Thanks for your reply. I understand the second answer better than the first. The only thing is since the partners are loaning the capital whenever the business make the money to pay it back do I just reverse the entry?

I real confused about the Sole prop.; especially when you mentioned that owner could owe the business money: Let me draw a picture:

owner deposit 1000 in checking account:
dr cash cr owners equity

before the opening of checking account, bought 500 worth of business items: Do I:

dr expenses 500 cr owners equity another 500

I'm confused about the loan part.

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blrgcpa63

Contributor

04/09/06 9:17pm PDT

You can do that. It would be correct. However, I thought that you said the owner loaned the business the money and wants to be reimbursed, you use a loan account.

If the owner's loan account has a credit balance, it means that the business owes him money. If it has a debit balance, it means that he owes the business money.

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yocos2001

Contributor

04/10/06 1:22am PDT

Gotcha, now I understand; I had to hear it from a different angle; since it is a loan I would do your first entry.

How come you did not give the same entry for the LLC? They are loaning the money as well?

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internetaccountant

New Member

09/29/06 7:13pm PDT

"Prior to this, owner spent money out of personal funds to buy things for the business. Do I add those amounts to the equity account and then record those expenses? Should a check be written from the business account to reimburse the owner for business expenses purchased with personal money?"

Yes. You should

db cash
cr owners equity (or retained earnings)

db Expense accounts
cr cash

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internetaccountant

New Member

09/29/06 7:20pm PDT