Question

Kobe and Akeelah decide to open a new restaurant. They each contribute $10,000 to get the business off the ground. How should their contributions be classified?

Answer 1

Kobe and Akeelah's $10,000 contributions to the restaurant are considered equity financing and will be recorded as owner's equity or partners' equity on the balance sheet.

Step-by-step explanation:

Kobe and Akeelah's contributions to their new restaurant can be classified as equity financing, which is a common method of funding a small business. They are using their personal funds, just like business owners often dip into their own bank accounts or secure loans to cover startup costs. Their individual investments of $10,000 each would be classified on the business's balance sheet as owner's equity or partners' equity depending on the legal structure of the restaurant. This type of investment is contrasted with debt financing, where funds are borrowed and need to be repaid.

Answer 2

Kobe and Akeelah's contributions to their restaurant should be classified as owner's equity, reflecting an investment into their business. Such personal funding is typical in small business startups, with angel investors as an alternative source.

Step-by-step explanation:

Kobe and Akeelah’s contributions to their new restaurant venture should be classified as owner's equity. In business, when the owners put their funds into the venture, it is an investment, and these amounts are recorded in the equity section of the business’s balance sheet. This type of financing is quite common in small businesses, including startups such as restaurants or gas stations, where the owners cover startup costs through personal funds or by borrowing, possibly using personal assets as collateral. At times, angel investors may contribute capital in exchange for ownership equity, but in this case, Kobe and Akeelah are using their resources.