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GreeneWrench
Level 2

Closing out Owner Investment and Distribution at end of year.

I closed the books on the first of the year, and net income was automatically moved to retained earnings as expected on the balance sheet.

 

It still shows a positive balance in owner's investment and negatives in each of the partner distribution accounts.  My thought process was to close these accounts out to retained earnings to get a clear view of the current year.  Are there any problems with doing this?

 

Just to clarify, we are a 2 person LLC filing as S-Corp.  The balance in owners investment is 50/50 start up money for the business, and the distributions taken are of equal amount taken at the same time.

 

Any help or thoughts on this are much appreciated!

Solved
Best answer January 25, 2019

Best Answers
Rustler
Level 15

Closing out Owner Investment and Distribution at end of year.

you close the drawing and investment as well as the retained earnings account to partner equity with journal entries

debit investment, credit equity
debit equity, credit drawing

debit RE, credit equity for the partner share

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23 Comments 23
Rustler
Level 15

Closing out Owner Investment and Distribution at end of year.

you close the drawing and investment as well as the retained earnings account to partner equity with journal entries

debit investment, credit equity
debit equity, credit drawing

debit RE, credit equity for the partner share

GreeneWrench
Level 2

Closing out Owner Investment and Distribution at end of year.

Thank you Rustler!

 

My Chart of accounts only has the following accounts for equity:

Opening Balance Equity

Owner's Investment

Owner's Pay and Personal Expenses

 - Partner Distributions (Sub a/c 1)

 - Partner Distributions (Sub a/c 2)

Retained Earnings

 

I'll add a new Owner's Equity account and do the journal entries to move everything over.   This makes more sense to keep everything in order and easy to see.  We only started September 2018, so lots of learning points getting into the swing of things.  Planning to close out each 4 week period starting this year so I should have this down pat in no time!

Rustler
Level 15

Closing out Owner Investment and Distribution at end of year.

Partners have equity in the business too or they can't be partners, when someone joins as a partner they bring something to the mix, expertise valued at some amount, cash, equipment, something.

 

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

 

RedTexBU
Level 2

Closing out Owner Investment and Distribution at end of year.

I have a question related to this.  Do we date our Journal entries Dec 31, 2018 when we are closing the books for 2018?  Or Jan 1 2019?

MrsBryant8
Level 2

Closing out Owner Investment and Distribution at end of year.

Distributions are zeroed out to Retained Earnings on Jan 1st so the 12/31 Bal Sht will show the correct Distributions and Retained Income for the year

Anonymous
Not applicable

Closing out Owner Investment and Distribution at end of year.

Rustler

I've picked up a new client and their owner investment and distribution have never been closed out. Would I still make the same journal entries you have listed here in this thread? 

Rustler
Level 15

Closing out Owner Investment and Distribution at end of year.

@Anonymous 

Yes you would

rpbfinancial
Level 1

Closing out Owner Investment and Distribution at end of year.

I'm not sure why partners are being talked about in the reply since you said it is an S-Corp?

patfaith
Level 1

Closing out Owner Investment and Distribution at end of year.

It states that it is a 2 person LLC FILING as an S-Corp.

SanDiego
Level 1

Closing out Owner Investment and Distribution at end of year.

If retained earnings are negative do we still debit them to partner equity?

Val24
Level 1

Closing out Owner Investment and Distribution at end of year.

Is a S-Corp year end close out different from a partnership?

TirzahC
QuickBooks Team

Closing out Owner Investment and Distribution at end of year.

Thanks for visiting the Community, Val24.

 

S-corp accounting is a lot different than a sole proprietor or partnership when it comes to ownership, documentation, and payroll. I'd suggest consulting an accountant to help and guide how to record this. Your accountant can provide more expert advice in dealing with this concern.

 

Just in case, I'll add these articles for future reference:

Keep posting here in the Community if you have other questions. I'm always here to offer assistance. Have a good one.

NMbd
Level 1

Closing out Owner Investment and Distribution at end of year.

This sounds correct 

quinn1
Level 4

Closing out Owner Investment and Distribution at end of year.

I now understand how to clear out my equity account into retained earnings. My question is, I have not done this in the past two years. I want to clear it now, do I do the same steps but for each year? Thank you

rjsebrown
Level 1

Closing out Owner Investment and Distribution at end of year.

Hello. I have a similar question.  For a SMLLC that needs to close out the Owner Draws - there is not enough R/E to satisfy the offset, however, there is enough in both R/E and Paid in Capital combined.  For example, Owner Draws = -$100k.  R/E = $45k. PIC = $59k.  Would the journal entry reduce the R/E to $0 and the remaining $55k reduce the PIC account? 

Rainflurry
Level 12

Closing out Owner Investment and Distribution at end of year.

@rjsebrown 

 

Is your SMLLC taxed as a sole proprietorship (SP) or s-corp?  Your question mentions owner's draw, which is specific to SPs as well as PIC and retained earnings which are not applicable to SPs.   

rjsebrown
Level 1

Closing out Owner Investment and Distribution at end of year.

The LLC is being treated as a sub s for tax purposes.  Thx!

Rainflurry
Level 12

Closing out Owner Investment and Distribution at end of year.

@rjsebrown 

 

You should make sure that you have adequate stock basis to cover the $100K distribution.  Stock basis is more involved than just your initial investment + retained earnings.  Look at your 2022 Form 1120-S, Schedule M-2, line 8.  It will be different than your initial investment + retained earnings. Check with your CPA if it's close to avoid being taxed on the distribution - if that's a concern.

 

To answer your original question, just assign the payment to a '2023 - Distributions' equity account (set one up if you don't have one).  At year-end, make the adjusting journal entries to take into account income, loss, distributions, etc. 

 

Martha92
Level 1

Closing out Owner Investment and Distribution at end of year.

Hi Rustler,

 

I have also picked up a new client and their owner investment and distribution have never been closed out.  When should I make the entry to close out distributions?  Not sure if this matters, but they keep their books open for a month or two after the new year since many of their December invoices are not received until the beginning of January. 

 

 

Martha92
Level 1

Closing out Owner Investment and Distribution at end of year.

Hi Rustler

 

I have also picked up a new client and their owner investment and distribution have never been closed out. They do not close their books until February due to various invoices and entries made in January for the past year's jobs.  Would I close out the owner's distribution account right after their books are closed in February?

kattqtt
Level 1

Closing out Owner Investment and Distribution at end of year.

Do we also need to close prior distributions if it's partnership (1065) and Sole Proprietorship (1040)?? I do know of s-corp we have to close out prior dist against retained earnings.. not sure if it's the same for 1065 and 1040. Please advise. Thanks in advance!

Rainflurry
Level 12

Closing out Owner Investment and Distribution at end of year.

@kattqtt 

 

Partnerships don't have retained earnings (R/E).  Technically, partnerships only need one equity account for each partner - Partner 1 Capital, Partner 2 Capital, etc.  All distributions should be closed to their capital account.  

kattqtt
Level 1

Closing out Owner Investment and Distribution at end of year.

Thank you so much! How about for sole proprietorship? where do I put the prior distributions?? 

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