cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
Level 2

Owners Drawing is more than Yearly Income

Hi. What to do if the owner drawing is more than the year end retained earning? How to adjust? Will I carry forward to the next year? Or the owner will pay off from personal fund? Since the owners drawing will be adjusted at the end of the year by retained earning, so, if the retained earning is less than the owner drawing, what will be the accounting treatment? Thank you.

Solved
Best answer February 06, 2020

Best Answers
Highlighted
QuickBooks Team

Owners Drawing is more than Yearly Income

Good morning, @Marufa0013.

 

Thanks for reaching out to Community. Nice to have you here.

 

For the best advice, I recommend reaching out to your accountant. However, you could use a journal entry to move draws of the prior year into retained earnings.

 

To create a journal entry:

 

  1. Click the +New button.
  2. Select Journal Entry.
  3. Fill out the fields to create the journal entry.
  4. Choose Save and new or Save and close.

For more information, check out the video included in this article: Create a journal entry in QuickBooks Online.

 

If you have further questions or concerns, feel free to reach back out anytime. I'll always be around to help out. Take care!

 

View solution in original post

5 Comments
Highlighted
Level 15

Owners Drawing is more than Yearly Income

It depends, 

 

if this company is taxed as a corporation, then the excess over equity that is withdrawn is ordinary income and it reported as such, in corporation equity can never go below zero .

 

In a sole proprietor, just close equity investment, equity drawing, and retained earnings to equity and let it carry forward.

 

In a partnership you need to read the partnership agreement to see how that situation has to be addressed, typically excess draw over equity is ordinary income, or is prohibited totally and the excess is a loan to the partner

 

I would suggest you get with a tax accountant to be sure, tax reporting is not something to guess at

Highlighted
QuickBooks Team

Owners Drawing is more than Yearly Income

Good morning, @Marufa0013.

 

Thanks for reaching out to Community. Nice to have you here.

 

For the best advice, I recommend reaching out to your accountant. However, you could use a journal entry to move draws of the prior year into retained earnings.

 

To create a journal entry:

 

  1. Click the +New button.
  2. Select Journal Entry.
  3. Fill out the fields to create the journal entry.
  4. Choose Save and new or Save and close.

For more information, check out the video included in this article: Create a journal entry in QuickBooks Online.

 

If you have further questions or concerns, feel free to reach back out anytime. I'll always be around to help out. Take care!

 

View solution in original post

Highlighted
Level 2

Owners Drawing is more than Yearly Income

Hi. Thank you very much. 

It's a partnership account but one partner is buying out another one. And they don't have to pay tax. It is non taxable. Problem is one partner made lots of personal expenses and it's more than the retained earning of that particular year. In this situation, how to adjust the owner's drawing account? Thank you again for your reply.

Highlighted
QuickBooks Team

Owners Drawing is more than Yearly Income

Hi there, @Marufa0013.

 

If they’re using the business account, it should be recorded as a personal expense. That way, the retained earnings will be corrected.

 

Here’s how:

 

  1. Click the + New icon, then choose Expense.
  2. Select a Payee from the drop-down menu.
  3. Select the Bank Account, Cash Account, or Credit Card they used to make the purchase.
  4. Enter the necessary information.
  5. Hit to Save and close.

 

I added an article for your future reference about organizing your account in QuickBooks Online. Help articles. I’m sure you’ll find it helpful.

 

I’ll be around to help.                

Highlighted
Level 15

Owners Drawing is more than Yearly Income


@Marufa0013 wrote:

Hi. Thank you very much. 

It's a partnership account but one partner is buying out another one. And they don't have to pay tax. It is non taxable. Problem is one partner made lots of personal expenses and it's more than the retained earning of that particular year. In this situation, how to adjust the owner's drawing account? Thank you again for your reply.


You close the accounts to partner equity

debit equity investment, credit equity

debit equity, credit equity drawing

debit retained earnings, credit each partner with their share per the partnership agreement

 

If the final equity of the partner is negative, that would reduce the purchase price for his interest in the partnership. 

 

the buy out is a personal finance issue, let's say the leaving partner has an equity account, after roll up journal entries of negative 1K (-1K) and the buy out price is 5K

 

The buying partner would deposit 1K in the business using leaving partner equity as the source account for the deposit, that will zero out the leaving partner equity, and the leaving partner will get 4K.

 

If this ends up being a one partner company, a final income tax return, sales tax return, etc have to be prepared and the partnership closed.  A partnership must have two or more partners

Need to get in touch?

Contact us