Balancing a New Business

An owner registers their new company with the state department of business licensing. They take their business license down to the bank and transfer $20,000 of their own money into a new business account. They have now “capitalized” their business, which means they made a contribution to capital, which increases owner’s equity.

At the same time, they have increased the balance in their checking account. From a bookkeeping perspective, you have to make two entries for this one business transaction, and these two entries balance each other out.

$\text{A}=\text{L}+\text{OE}$

$\$20,000=\$0+\$20,000$

Now, suppose the owner also borrows $5,000 from the bank, which is then deposited into their account. A loan will not increase their equity. It is not a capital contribution. It is debt, which is a liability.

Now, the equation looks like this:

$\text{A}=\text{L}+\text{OE}$

$\$25,000\left(\text{cash}\right)=\$5,000\left(\text{bank loan}\right)+\$20,000\left(\text{original capital contribution}\right)$

Assets are what the business owns. Liabilities are what it owes, and equity is the amount of the company that belongs to the business owner.