How to represent "out of pocket" purchases in general ledger journal entry?

Question

If you use personal money to pay for expenses (advertising, equipmemt), how do you represent this in a journal entry? Normally, if the money was coming from the business, you would just decrease the cash account but in this case, the cash account is zero. Anyone?

Answer 1

You can treat the out-of-pocket payment as an addition to your capital. This is assuming you're running a sole propertorship.

Also, it could be a loan to the company. Either way, your cash account is debited and a corresponding credit goes to either your loan account or capital account.

The second leg of the transaction, you'll debit the particular expenses account and credit cash.

Hope this helps?