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March 9, 2023
Question

Member Equity Accounts

  • March 9, 2023
  • 5 replies
  • 29 views

I was on here last year trying to find an answer and Rustler came the closest but no cigar.  This is an Equity question and I will try to be brief as I can.

 

Example:

I have three member/Partners.  We receive money from our clients.  When we receive it we deposit it to the bank.  After the deposit we deduct all expenses for the job we received the money on.  We end up with a net profit.  The net profit is split 4 ways.  40% goes into a reserve bank account and the remaining 60% is split between the member/partners.

 

Since the money has been deposited to the bank already, we do a bank transfer from bank A to bank B for the reserve.

 

Then we do a check from the bank and debit owners draw.  The money never sits in the bank long before we draw it out.  The problem is, at the end of the year we have a huge negative equity balance for each member/partner.

 

I understand that if I put my own personal money into the business, I would credit my investment account causing a positive balance and when I take it out I would debit owners draw:

 

Credit Investment $1000 

Debit owners draw $1000

Net Equity equals $0

 

Sorry this is so long

 

As it is now, there is never really an investment, only a draw

 

Money from client $15,000 deposit to bank A net effect is $15,000 credit

All expenses have been reduced to $10,000 net profit

40% is bank transferred to bank B ($4,000) leaving a balance in the bank of $6,000

We write a $2,000 check to each member and debit owners equity.

 

This leaves a negative -$2,000 in each members account.

 

What initial entry can I make that will increase the  investment equity by the initial $2,000 

so that when I do a debit to owners draw it just balances out?

 

Any help would be greatly appreciated.  I know I said brief, but.....

 

Clay Embick

5 replies

Rainflurry
Level 11
March 9, 2023

@cembick23 

 

This leaves a negative -$2,000 in each members account.

 

What initial entry can I make that will increase the investment equity by the initial $2,000

so that when I do a debit to owners draw it just balances out?

 

Unfortunately, you can't until year-end.  QB books all current year profits to Net Income and you can't make any adjusting entries to that without using income or expense accounts which, obviously, you don't want to do.  At year-end, your net income will be closed out to Retained Earnings, at which point, you can allocate that to the equity accounts with an adjusting entry. 

cembick23Author
March 11, 2023

So at the end of the year how do i know which accounts to offset and how do i do it?  If I never show an investment to owners equity to offset the draw, I am always going to be negative.

 

Been looking for a real good answer on this for almost 2 years

Thanks

 

 

Rainflurry
Level 11
March 12, 2023

@cembick23 

 

You didn't mention the business structure but it sounds like an LLC taxed as a partnership.  Let's use the example from your original post.  Your net income is $10,000, all of which will sit as net income on your P&L until year-end.  On 1-1-24, QB will automatically transfer the $10,000 from net income to members' equity.  At that time, you will have ($6,000) in partner draws.  To zero that out, debit members' equity and credit their respective equity accounts.