If you own or manage a business, you should correctly record all financial transactions. Financial transactions might include contributions, which can be either received or paid out. The type of contribution will determine how it is reported on the business's financial statements. The two main financial statements used by most companies are the balance sheet and income statement. Some contributions are reported on the balance sheet, and others are not.
Balance Sheet and Income Statement
The most commonly used financial statements are the balance sheet and income statement. The balance sheet gives a reporting of the company's assets, liabilities and equity. It is a portrayal of the company's financial position at an exact moment. The income statement shows the company's revenue, expenses and net income. It is a reporting of the company's transactions for a specific period.
Capital contributions are funds provided to the company by a partner or owner. They increase the company's equity, or investment, amount. Therefore, these amounts are reported on the balance sheet in the equity section. You should record the contribution as a credit to capital contributions and a debit to cash. If the contributions are made by some method other than cash, debit the appropriate asset account instead of the cash account.
Contributions as Revenue
Some businesses, particularly nonprofit organizations, receive contributions from individuals or businesses. These contributions are used for regular business operations and are classified as revenue. Revenue is reported only on the income statement as a credit to the appropriate revenue account. Revenue is not reported on the balance sheet. However, the amount received is recorded on the balance sheet as a debit to cash or another asset account. Nonprofits use the statement of activities, instead of the income statement.
Contributions as Expenses
Businesses sometimes make charitable or political donations to others. Many businesses also make contributions to employees' pension or retirement funds. These contributions are classified as expenses and are reported on the income statement as debits to the appropriate expense classification. Expenses are not reported on the balance sheet. However, the amount contributed is recorded on the balance sheet as a credit to cash.