Donated capital, also known as contributed capital, is the value of resources given to a company without the expectation of a return. This type of capital is typically associated with non-profit organizations, as people and businesses donate funds to support the non-profit’s mission, but it can also be relevant to for-profit businesses.
In the context of for-profit businesses, donated capital might come from founders or other parties who provide resources to the business without receiving equity or other consideration in return. For example, if a founder contributes cash, equipment, or other assets to a startup but does not take an equivalent amount of equity, this could be considered donated capital.
Donated capital is recorded on the balance sheet in the shareholders’ equity section, often under a line item like “additional paid-in capital” or “contributed capital. In a non-profit setting, it might be recorded as a donation or contribution, depending on the organization’s specific accounting practices.
It’s important to note that accounting for donated capital can be complex, and there are specific rules and regulations that need to be followed, especially for non-profit organizations. Businesses and non-profits should work with an accounting professional or financial advisor to ensure that donated capital is recorded and reported correctly.
Example of Donated Capital
Let’s say a local entrepreneur, Jane, decides to open a coffee shop. Her friend, Mark, is excited about the business and wants to support her venture. Mark decides to donate $20,000 to help with the initial start-up costs. He does not want any ownership stake or anything in return for his donation; he just wants to support Jane’s business.
In this case, the $20,000 that Mark donated is considered donated capital. Jane would record this on the coffee shop’s balance sheet as contributed capital under the equity section.
The journal entry to record this donation might look something like this:
- Debit: Cash (Asset) $20,000
- Credit: Contributed Capital (Equity) $20,000
This increases the company’s cash assets and equity by $20,000, reflecting the donated capital. Note that this is a simplified example, and the exact accounting treatment might vary based on specific circumstances.
For non-profit organizations, the treatment would be similar, but the donation would typically be recorded as revenue rather than contributed capital. Always consult with an accounting professional or financial advisor when dealing with donated capital or other complex financial transactions.