Almost every owner puts personal money into the business at some point: to open the account, to cover a slow month, or to buy equipment before the revenue catches up. The transfer takes thirty seconds. Recording it correctly is where things go wrong, because the deposit lands in the business account looking exactly like a customer payment, and if it gets categorized as income you will pay tax on your own savings.
There are only two correct ways to book it: as an owner contribution, which is equity, or as a loan from the owner, which is a liability. This guide explains the difference, which one fits your entity type, and how to record the money when it comes back out. For corporations and partnerships the choice has real tax consequences, so confirm it with your CPA. The bookkeeping below is what keeps either choice defensible.
It is never income: the two ways to record it
Money you move from your personal account into the business is not revenue. The business did not earn it. Booking it as sales overstates your income, inflates your tax bill, and makes every margin on the profit and loss statement wrong. It is not a negative expense or a miscellaneous deposit either. It belongs on the balance sheet.
As a contribution, the entry is a debit to the bank account and a credit to an equity account, usually called Owner Contributions or Owner Investment in a sole proprietorship or LLC, and Additional Paid-In Capital or Shareholder Contributions in a corporation. Equity means the money is now the business's to keep. There is no repayment schedule and no interest, and you take it back later only as a draw or a distribution.
As a loan, the entry is a debit to the bank account and a credit to a liability account such as Loan from Owner or Due to Shareholder. A liability means the business owes the money back. Repayments of principal reduce that liability and never touch the profit and loss statement. Only interest, if the loan carries any, is an expense to the business and income to you personally.
Which one fits your entity type
If you are a sole proprietor, or the only member of an LLC that has not elected to be taxed as a corporation, you and the business are the same taxpayer. You cannot meaningfully lend money to yourself, so the practical answer is to record everything you put in as an owner contribution and everything you take out as an owner draw. Neither affects taxable income. The accounts exist so the bank balance reconciles and you can see how much of your own money is still in the business.
In a partnership or multi-member LLC, a contribution increases that partner's capital account, and the operating agreement may say whether contributions must be proportional and what happens when one partner puts in more than the others. A partner can also lend money to the partnership, but it should be a deliberate decision that every partner knows about, documented in writing, and tracked in its own liability account for that partner. Mixing one partner's loan into the capital accounts is a common source of disputes when someone leaves.
For an S corporation or C corporation, the distinction carries the most weight. A contribution increases your stock basis. A loan is a separate obligation, and the IRS expects it to look like one: a signed promissory note, a stated interest rate, a repayment schedule, and payments actually made on it. The below-market loan rules can impute interest on a loan that does not charge enough of it, with a limited exception for small loans, which is why CPAs typically set the rate at or above the applicable federal rate the IRS publishes each month. An undocumented loan that is never repaid on any schedule can be recharacterized as equity, and repayments you assumed were a tax-free return of principal can be treated as distributions instead. In an S corporation, whether the money went in as stock or as debt also affects how losses are deducted and how repayments are taxed, so make this choice with your CPA before the transfer rather than at tax time.
Paying business bills personally, and taking the money back out
The same rule applies when the money never passes through the business bank account. If you pay a business expense with a personal card or a personal check, record the expense in the business books in its proper category and credit Owner Contributions, or credit an amount due to you if the business is going to reimburse you. Do not skip the entry because the business account was not involved. The expense is real, and leaving it out understates your costs.
Taking money out mirrors how it went in. If it went in as equity, it comes out as an owner draw or a distribution, recorded against equity, not as an expense and not as payroll. If it went in as a loan, the repayment is split: principal reduces the Loan from Owner balance and interest is recorded as interest expense. Either way, getting your own principal back has no effect on profit. Owners who code their own repayments to an expense account such as reimbursements or contract labor understate profit and create a number nobody can support later.
Keep the trail clean. Move the money by bank transfer rather than cash so the date and amount appear on both statements, write a memo that says what it is, and avoid a stream of small transfers back and forth that nobody can untangle a year later. At each month end, the Owner Contributions, Owner Draws, and Loan from Owner balances should each be explainable by a short list of dated transfers. If there is a note, the loan balance in the books should match the note's amortization schedule.
Fixing it if it was booked wrong
If past contributions were categorized as income, the fix is a reclassification: move each deposit out of the revenue account and into Owner Contributions or Loan from Owner, dated when it actually happened. The way to find them is to compare deposits in the bank account against your invoices and sales records. Any deposit with no customer behind it is a contribution, a loan, a transfer between accounts, or a refund, and each has its own correct home. If the error sits in a year that has already been filed, tell your CPA before changing anything, because income that was overstated on a filed return may be worth correcting there too.
This kind of correction is routine work for EVO Bookkeeping. Ongoing bookkeeping is $199/month flat, with your bank, card, and processor accounts reconciled, transactions categorized, and your income statement and Balance Sheet delivered by day 2 of the following month, plus 1099 prep at year end. If your books are behind or need straightening out first, catch-up is a one-time fee of $199 for each month behind, completed within 2 days and guaranteed in writing. There are no contracts and you can cancel anytime. You can get an instant quote on our homepage.