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Owner's Draws in a Partnership. Which figure shows what can be withdrawn?

I have a partnership, myself and another are the two partners. We posted a loss the first 2 years in business, but now on the 3rd full year, we are currently posting positive net income. I am the only one who has added cash to the business each year for start up funds, so my equity account is different than my partner's. We have a 50/50 split of profits. 

We are finally to the point where we can draw money to pay ourselves. I know that each of our equity accounts need to show a positive number and need to be available before each of us can take a withdrawal. Am I supposed to be looking at just this fiscal year's owner's equity account balances to determine the availability of funds? Or am I supposed to also be looking at the rolling balance total including the first 2 years of business also? 

If I include the first 2 years as a combined total with this year, only my equity account is a positive number, my partner's is negative.

Thank you in advance for any help, I am a little rusty on equity accounts still. 

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Best answer 12-10-2018

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Established Community Backer ***

I recommend you have the following for owner/partner equi...

I recommend you have the following for owner/partner equity accounts  (one set for each partner if a partnership)

owner/partner equity
owner/partner equity drawing - you record value you take from the business here
owner/partner equity investment - record value you put into the business here

at the start of the new year, you roll up drawing and investment to the main equity account using journal entries.  that way the drawing and investment account show only that years activity

debit investment, and credit equity
debit equity, and credit drawing

then you roll up retained earnings (RE), again with a journal entry

for a profit
debit RE, and credit equity (50% for each partner)

for a loss
debit equity (50% for each partner), and credit RE

So during the year you look at overall equity.

if you make the equity accounts from drawing and investment sub account of equity it makes it easier too

Technically, equity should never go negative, some allow it, some require an investment to bring it back to zero.

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Established Community Backer ***

I recommend you have the following for owner/partner equi...

I recommend you have the following for owner/partner equity accounts  (one set for each partner if a partnership)

owner/partner equity
owner/partner equity drawing - you record value you take from the business here
owner/partner equity investment - record value you put into the business here

at the start of the new year, you roll up drawing and investment to the main equity account using journal entries.  that way the drawing and investment account show only that years activity

debit investment, and credit equity
debit equity, and credit drawing

then you roll up retained earnings (RE), again with a journal entry

for a profit
debit RE, and credit equity (50% for each partner)

for a loss
debit equity (50% for each partner), and credit RE

So during the year you look at overall equity.

if you make the equity accounts from drawing and investment sub account of equity it makes it easier too

Technically, equity should never go negative, some allow it, some require an investment to bring it back to zero.

View solution in original post

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Thank you for your help. We currently have a main Owner's...

Thank you for your help. We currently have a main Owner's Equity account set up for each partner, along with an owner's contribution and owner's Draw sub account under each.

However, one thing I have not been doing, is rolling up investment and draws to each main Owner's Equity account, and have not been rolling up RE either. I'm guessing I can still do this by backdating the entries for 1/1/14 and 1/1/15? Guessing I just need to also ensure they match up with the K-1's from each tax year?

And when you use the journal entry to roll up RE, I am either debiting or crediting the main Owner's Equity account for each, right? So then the sub accounts for draws and contributions should only show the current year's activity, and each main one will show the combined activity/balance from the start of the business?

And, after I would update these entries, I would then be looking at each main Owner's Equity account to see what is available to draw from?

Thank you and I apologize if my questions are redundant, as I am an amateur at this.
Established Community Backer ***

yes you can back date the RE roll up the K-1, providing...

yes you can back date the RE roll up

the K-1, providing equity in the K-1 is optional until you reach an annual amount of income, I do not have that amount handy but it is in the millions.  Personally I do not give the IRS more info than absolutely required - your choice

Tax accounting is sometimes different than QB due to the way QB operates, I would be more concerned with QB

Yes in answer to the draws, again y'all need to make a decision about how you treat negative equity, either allow it but no draws, or do not allow it and require an investment
Established Community Backer ***

"I know that each of our equity accounts need to show a p...

"I know that each of our equity accounts need to show a positive number and need to be available before each of us can take a withdrawal."

That is not quite correct. Running your Balance Sheet might show you that net Income is positive, which means the Current Cycle has positive Equity; it just isn't posted to Equity, yet. You can decide if the business can survive without some funds in the bank, based on current Performance.

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Re: yes you can back date the RE roll up the K-1, providing...

I might be in a ideal position doing the qb and ttax business for 2 llc's.  I keep fine tuning my qb accounts so they match the account for the 1065.     my goal is to make them the same.  W ttax business. there is a form in there called capital account and basis report. i it shows all parnters beginning cap act, how much is contributed (my eq act joe contrib),  each partners share of income (net income from p/l) then it debits all withdrawls (eq account joe draw).  One llc has stock investments and the statement never matches the 1099 but with a little invest adjust asset act you can take care of the minor differences.   I do the dreaded 1065 "L" balance sheet and work at qb till all the numbers are the same.   first of year using gen journal I put all the draws and contribs and retained earnins  (net income) into their respective member equity accounts. now everyone is back to zero draw and contrib for the start of the year and all qb equity accounts match the k-1's  and I'm supremely happy.    

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