Owner's Contribution and Draw

I suggest that after the first of the year, and after any income tax adjustments are made, you:

1. clear equity drawing to equity, debit equity & credit drawing for the amount in drawing

2. clear equity investment to equity,  debit investment for the amount in the account, & debit equity investment

then if you want money out, cut a check and use equity drawing as the expense (reason) for the check

you can do that at any time, but I think it is cleaner to start the new year with equity investment and drawing at zero for the new year

For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts  (one set for each partner if a partnership)

[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

Thanks, Rustler. 

I like the idea of starting the year fresh, you answered a question without me asking it! 

I just remained the accounts to:

Owner's Equity 

>> Equity
>> Equity Drawing
>> Equity Investment 

If I understand 1 & 2 correctly, and did you mean credit here --> "2. clear equity investment to equity,  debit investment for the amount in the account, & debit equity investment"

I just do a journal entry for drawing and investments to move the money to equity. Assuming the "equality" account will always show past and current year totals.   

For equipment which i took full deduction (section 179), I make monthly payments on these, so I know these loan are not expenses anymore because I took full deduction of the equipment, so I only keep track of the interest as an expense, and categorize the monthly loan payments as draws. Does this seem correct?

I'm confused with the response.  Let's say I have $10,000 I invested in the company and took off $15,000 during the year.  Do I do a journal entry that shows I took out $5,000?  For example:  

Owners Equity $10,000

  OWner's Draw $10,000

and therefore the net effect is $5,000?  IS the $5,000 what I would report on my personal taxes?

@joeyc126 

The $5K would be reported on your 1040 Schedule D if it exceeds your basis in the sole proprietorship (SP).  In your example, your basis in the SP is $10K.  However, that number increases by the profits of the business.  You pay income tax on the profits that you report on Schedule C.  As long as you have $5K in profits, the $5K draw is not taxed because it will be taxed when you report it on Schedule C.  If you don't have $5K in profits, any amount you take out as a draw that exceeds your basis ($10K investment + profit) will be taxed as capital gain.

Hello Rustler,

I noticed that you have three accounts listed:

Equity 

Owner's Draw

Owner's Investment

I'm trying to clean up a client's books so forgive me if this is a silly question. Is the Equity account with the 25k in your illustration a header or an actual account that you created to be the parent account? I ask because with the new layout of Quickbooks online when I try to create an Equity account it doesn't allow me to specify parent as a characteristic of the account with the Draw and Investment as subaccount. Or am I understanding you wrong?