Accounting for an injection of cash starts with one question: did the money come from an owner or investor, or did it come from a lender? Every cash injection debits your Cash account. The credit side is where equity and debt part ways, and that choice determines how the balance sheet reads, whether the interest is deductible, and what you have to file with regulators.
Equity or Debt: The Choice That Drives the Entry
Equity financing means capital given in exchange for an ownership stake. Debt financing means capital lent to the business that must be repaid, usually with interest. A few hybrid instruments blur the line, but most injections sit cleanly on one side.
Equity has no fixed repayment schedule. Returns come through dividends or a later sale of the ownership stake, and the cost to founders is dilution. Debt has a fixed obligation to repay principal and interest on schedule. Lenders take no ownership, but missed payments can trigger default, and loan agreements often carry covenants (such as a minimum debt-service coverage ratio) that can accelerate the balance if breached.
Recording an Equity Injection
All equity injections follow the same pattern: debit Cash, credit an equity account. Which equity account depends on the entity.
Corporate Stock Issuance
When a corporation sells stock, the entry depends on whether the shares carry a par value. Par value is a nominal per-share amount set in the corporate charter, often something trivial like $0.01.
If the stock has a par value and sells above it, split the credit. The par value portion goes to Common Stock; the excess goes to Additional Paid-in Capital. A corporation selling 100,000 shares with a $0.01 par value at $5.00 per share records:
- Debit Cash $500,000
- Credit Common Stock $1,000 (100,000 shares × $0.01 par)
- Credit Additional Paid-in Capital $499,000
If the shares have no par value, the full $500,000 goes to Common Stock or Paid-in Capital without splitting. Either way, assets rise by $500,000 and equity rises by $500,000.
Owner and Member Contributions
Sole proprietors, partnerships, and LLCs have no stock to issue. An owner depositing personal funds debits Cash and credits an equity account named for the entity type: Owner’s Capital, Owner’s Equity, or Member’s Capital. A sole proprietor contributing $50,000 records:
- Debit Cash $50,000
- Credit Owner’s Capital $50,000
In a multi-member LLC or partnership, each member’s contribution is tracked in a separate capital account, because those balances drive each member’s share of profits, losses, and distributions under the partnership agreement.
Recording a Loan or Bond
Debt injections increase both assets and liabilities. Debit Cash and credit a liability account: Notes Payable for a bank loan, Bonds Payable for issued bonds. A $500,000 bank loan:
- Debit Cash $500,000
- Credit Notes Payable $500,000
The classification on the balance sheet depends on when principal is due. Any principal payable within the next 12 months is a current liability; the rest is long-term. If $100,000 of your $500,000 loan is due in the coming year, the balance sheet shows $100,000 in Current Portion of Long-Term Debt and $400,000 in Long-Term Notes Payable.
Secured loans usually involve a lender filing a UCC-1 financing statement to establish a legal claim on the collateral. The filing itself does not generate a journal entry, but the collateral arrangement belongs in the notes to your financial statements because it restricts your ability to sell or transfer those assets.
Booking Interest as It Accrues
The opening entry only captures the day cash arrives. Interest has to be recorded as it accrues, which trips up businesses that keep books on a cash basis internally but need accrual statements for lenders or investors.
At each period end, record accrued interest with an adjusting entry: debit Interest Expense, credit Interest Payable. When the payment goes out, reverse the payable, reduce the principal, and credit Cash:
- Accrual: Debit Interest Expense / Credit Interest Payable
- Payment: Debit Interest Payable + Debit Notes Payable (principal portion) / Credit Cash
Splitting each payment between principal and interest is not optional. The principal portion reduces the liability; the interest portion is an expense that reduces net income. Booking the whole payment to one account misstates both.
Tax Treatment of the Injection
Neither equity contributions nor loan proceeds are taxable income to the business. Depositing $200,000 from an investor or a bank does not trigger a tax bill.
For corporations, the Internal Revenue Code explicitly excludes capital contributions from gross income.1IRS. Revenue Ruling 2007-31 – Contributions to the Capital of a Corporation Loan proceeds are excluded because the offsetting obligation to repay means no net wealth has been gained.2Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined
The tax difference shows up on the interest side. Business interest is generally deductible. Businesses with average annual gross receipts above the small-business threshold face a cap: the deduction cannot exceed business interest income plus 30% of adjusted taxable income, and disallowed interest carries forward.3Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest Small businesses that meet the gross receipts test are exempt from the limit. Dividends paid to shareholders are not deductible, which is why debt is often called tax-advantaged compared to equity.
When the IRS Reclassifies an Owner Loan as Equity
A frequent and expensive surprise is having the IRS treat what you booked as a loan as an equity contribution instead. This most often hits owner-funded businesses where the “loan” from a founder lacks the features of real debt. If reclassification succeeds, the business loses its interest deductions, and repayments can be recharacterized as dividends.
The statutory factors include whether there is a written promise to pay a fixed sum on a specific date, whether the debt is subordinated to other obligations, the debt-to-equity ratio of the company, whether the instrument is convertible to stock, and whether the debt holders are the same people who hold the stock.4Office of the Law Revision Counsel. 26 U.S. Code 385 – Treatment of Certain Interests in Corporations
Courts have added red flags: no fixed maturity date, no interest paid or demanded, a lender with no practical ability to enforce repayment, and a company so thinly capitalized that no outside lender would have extended the money. When a founder lends to their own company, the safe approach is to treat it exactly like a third-party loan. Draft a promissory note with a market-rate interest rate, a maturity date, and a repayment schedule. Then follow it.
Convertible Notes and SAFEs
Startups often raise through instruments that sit between debt and equity, and their classification can change over time.
A convertible note starts as debt. It accrues interest, has a maturity date, and sits as a liability. When a qualifying event occurs (usually the next equity financing round), it converts into stock: debit Notes Payable, credit the appropriate equity accounts for the newly issued shares.
SAFEs are harder. They have no maturity date and accrue no interest, so they lack the usual features of debt. Many companies treat them as equity-like instruments from the outset, though the correct treatment depends on the specific terms and the accounting framework in use. Misclassifying a SAFE ripples through the financial statements and the cap table at once, so this is a place where professional guidance is worth the cost.
Bankruptcy Priority and Disclosure
Federal bankruptcy law puts secured creditors, administrative expenses, employee wage claims, and tax obligations ahead of general unsecured creditors, with equity holders at the bottom.5Office of the Law Revision Counsel. 11 U.S. Code 507 – Priorities For your books, this hierarchy is why disclosure notes should identify which liabilities are secured and what assets serve as collateral. Secured debt, unsecured debt, and equity are not interchangeable line items to a reader of your statements.
Form D Filing for Private Equity Raises
If the equity injection came from selling securities under a Regulation D exemption (the usual path for angel and venture financings), federal securities law requires filing a Form D with the SEC within 15 days of the first sale.6U.S. Securities and Exchange Commission. Filing a Form D Notice The 15-day clock starts on the date the first investor becomes irrevocably committed, not the date the funds arrive.
Form D is a notice filing, not a registration. It reports basic information about the company, the offering size, and executive officers. It does not need SEC approval, but missing the deadline can bring state-level penalties and put the exemption itself at risk. In the rush of closing a funding round, this is the deadline that most often slips.