How to close out owner's draw and owner's investment for a sole proprietorship

Hi Rustler, thanks for the explanation, that's exactly what I needed.

One follow-up question: I only have two equity accounts in my chart of accounts (owner's draws and owner's investments), but it sounds like I need a third account for owner's equity. Is that right? The owner's draws and owner's investments accounts are currently not sub-accounts (they came with QuickBooks this way; see this screenshot from my chart of accounts):

Should I make a new parent account called "owner's equity" and change owner's draws and owner's investments into sub-accounts of owner's equity?

I suggest for sole proprietors and partnerships the owner/partner equity accounts look like this:

[name] Equity (do not post to this account it is a summing account)

>> Equity ( first of the year roll up drawing and investment into this account as well as retained earnings)

>> Equity Drawing (record the value you take from the business here)

>> Equity Investment (record the value you put into the business here)

What the if Owner's Investment account is on negative? 

Do you close the summing equity account?

I have seen so many videos doing it the other way around.  closing equity to retained earnings.  Just curious why you would do it this way.

So my thought is, you shouldnt close owners investment and owners draw with retained earnings, unless you are taking out your profits, then it can go into owners draw. Your net income will carry to retained earnings, and if you should use the S corp elections, you would use the retained earnings to draw from SE tax free. so you want it to accumulate.  If I am wrong, please someone clarify for me. I got on to see if owners investment and owners draw gets zeroed out and I saw this post. Thanks!

so I found this: so that answers my question, hope it helps you too.

Yes, the owner’s investment and owner’s draw accounts are temporary accounts that are closed at the ...1. The balances in these accounts are transferred to the owner’s equity account, which is a permanent a...2. The owner’s equity account reflects the owner’s investment in the business and the profits or losses...3.

At the beginning of each accounting period, the owner’s equity account balance is carried forward fr...3. The owner’s investment and owner’s draw accounts are then reset to zero, and the new period’s transa...1.