If A Check Received From Debtors Is Given To A Company, Does It Also Go Into The Share Capital With Example

If a check / cheque received from Debtors / Accounts Receivable, then it is debited in the cash account. The other account “Accounts Receivable Account” is credited but it is not recorded under share capital account. The reason behind is that the cash received from debtors belongs to company’s checking account and not with the owners or shareholders’ account. The company or corporation is a separate legal entity having its own seal and enter into the contract. So, this transaction related to receiving cheque from debtors (customers) on the behalf of the company should be recorded in the company’s checking account and accounts receivable account. Customers purchased goods on credit from the company and not from shareholders and then make payments to company through check is also concerned with the business matters of company.

If the owners invested their own cash into the business i.e., purchased shares then it will be added to the share capital account which ultimately will increase it as this is a cash inflow for the company’s business. Shareholders or stockholders have rights to get a fair return of their investments i.e., on every purchased shares. However, in case of loss, the shareholders also bear the burden of loss on every share they purchased.

Shares can be issued or sold at par (at face value or nominal value), at premium (at a value greater than face value e.g., at $15 where par value is $10) or at discount lesser than face value). In issuance of shares to general public, the share capital account increases as more shares are purchased by public who are now becoming the shareholders or stockholders of the company or corporation. In case of issuance of shares at discount there is certain conditions to be followed such as there should be approval from general meeting and the financial estimations should show that the discount will amortize within specified time period, i.e., within three years. It should be transparent and fair.

Test Your Knowledge With An Example

When Check / Cheque of $500 received from a debtor, Mr. A, for goods / merchandise previously sold on account, then what is the Journal Entry in the book / journal of company business? What is the effect on Accounting Equation?

When cheque received and did not deposited into the bank account, then we debit cash account of $500 and credit sundry debtor account (Mr. A) as shown below:

                                                           Cash a/c $500

                                                                            Mr. A $500

                                                         (Check Received From Mr. A)

As cash in hand increases i.e., there is cash inflow, so cash is debited as a current asset while Mr. A, as a debtor account, which is also a current asset, is decreasing as the payment due from him is received by the company against the goods / merchandise sold to him on account / credit, so we credit it. The effect of this transaction on accounting equation is that cash increased the assets side by $500 and Mr. A on the assets side or right side is decreased by $500. This neutralizes each other effects and hence the accounting equation remains in balance.