Equity Accounts
All companies should have equity accounts, and I think they should be set up this way.
Equity-name
Equity-drawing-name
Equity-investment-name
Where ‘name’ is the name of the owner. One set of accounts for each owner.
Equity is the amount of the business you own, and to the business, that is a debt the business owes, as a result the amount is carried normally as a credit balance.
The Equity-drawing is an account used to hold the amounts of money an owner took out of the business. Money in this case really means value, if you took an item out of inventory that has value and that value is what is held in this account. Since it is a value that the business no longer owes you, a balance in this account is normally held as a debit.
So when you write your self a check, use the account Equity-drawing to record it. If you add money, or something that has value to the business, then the addition is Equity-investment and the Equity-investment account normally has a credit balance.
These accounts are used to hold the owner transactions during the year. At the end of the year when you do your EOY financial statements, QB creates an account called “Retained Earnings” and the net profit goes there on the first day of the new year.
Income taxes often require you make some adjustments to your financial records and your accountant or tax guy tells you what end of the year entries to make. Once that is done, you can and should “roll up” the equity accounts.
Unfortunately this is another area QB dropped the ball. There is no easy one button approach to rolling up equity annually. You have to make journal entries to do it. Why do it? Well you really do not have to if you are the sole owner, but for a business with more than one owner you have to distribute the profit according to the business agreement. I think even a sole owner should do it, if you do it annually then during the year you can see how much you are taking out of the business for that year.
So to roll up the equity accounts, put the final profit and loss statement on the table in front of you and bring up the journal (Menu Company>Make journal entries). I was always taught that the first line of a journal should be the debit, but it really makes no difference. (NOTE: each journal entry is a seperate entry, hit save and new after each one)
Set the date for the first of the year and …
IF … Equity-investment-name has a value
Debit Equity-investment-name for the amount
Credit Equity-name for the same amount
IF … Equity-drawing-name has a value
Debit Equity-name for the value
Credit Equity-drawing-name for the value
Now you are ready to distribute net profit which is held in the account Retained Earnings.
Debit Retained Earnings for the amount that goes to the owner
Credit Equity-name for the same amount
Do this for each owner. When you are done, Retained Earnings should have a zero balance, as well as the investment and drawing accounts - for the first of the year. Any amounts that were posted to those accounts after the beginning of the year will still be there waiting for you to do it again at the end of the current year.
Note: The above assumes you had a profit, if you had a loss the value in retained earnings will be a negative ( a debit) so the entries will have to be opposite, Credit retained earnings and debit owner equity.
