Accounting

Financial Investments in a Company by its Owners

Financial Investments in a Company by its Owners

When the owners of a company wish to make Financial Investments in it, they do not simply take money out of their wallets and deposit it in the company treasury with no documentation. The owners of a company can invest money in the company by only two methods:

  1. By purchasing equity shares that the company issues and assigns to them. 
  2. By lending money to the company.

 

Method 1: Buying Shares Issued by the Company

This transaction is documented through two bookkeeping ledger accounts: 

  1. A Current Account Ledger Account that represents the receipt of money (the ledger account is debited). 
  2. A Share Capital (a synonym for ownership) Ledger Account that represents the payment of money (the ledger account is credited).  

The owners receive shares in exchange for the money that they invest in the company. First and foremost, a share is evidence of the money that the owners invested in the company. At the same time, each share bestows ownership of some part of the company (depending on the proportion that the share represents of all shares issued by the company). The owners cannot take back money that they have invested as part of an issue of shares. 


Method 2: Lending to the Company

This transaction is documented through two bookkeeping ledger accounts: 

  1. A Current Account Ledger Account that represents the receipt of money (the ledger account is debited).
  2.  A Debt Ledger Account that represents the payment of money (the ledger account is credited). 

Every loan is accompanied by an agreement setting the terms of the loan, particularly the interest rate and repayment terms.

Financial Investments in a Company by its Owners551Financial Investments in a Company by its Owners