Need to make sure I'm handling Owner Equity and Owner Draw correctly

mike16 · ‎December 10, 2018

I understand the basic differences between these two accounts, and as a sole owner LLC, I have both an Owner Draw, and Owner Equity account set up (both account types equity).

I recently did a couple of transactions which made me wonder if I'm handling these correctly in QB.

I had a customer pay in cash, $4000. I deposited $3000 of that in my bank account. On the Make Deposits screen, I selected the customer, then at the bottom, I chose "cash back goes to <owner draw account>", then entered $1000 for the cash back amount. I think that much is correct. However, today I deposited (2) more cash payments, and I Decided that I would also include some of the $1000 I held back from the last deposit. How I handled this, was I put a check mark next to both customer names in the deposit list, then on the next blank line, I entered my name as the Payee, and in the next box "deposit from", I chose <owner draw> account. Is that correct?

I was looking at my owner draw account in Chart of Accounts, and I noticed that almost all of the transactions are in the "decrease" column, except for a few which are in the "increase column". The Owner Draw account is negative.

Thank you.

john-pero · ‎December 10, 2018

You have it basically right. Any money you draw out of the business for personal use during the year is <Owner Draw>. Because of the nomenclature of LLC and that you are considered a "member" I always call it <Member Draw> but that is semantics as long as you know what you are dealing with.

I do directly "reduce" or reimburse the draw when I put money back in but to be accountingly correct you should have a corresponding <Owner or Member Contribution> equity account where all money in goes.

Yes, Member Draw is a negative number since it represents money taken out of the business.

Once a year, upon closing the books, <Member Draw> should, along with the fiscal Profit or Loss, get posted to the overall <Owner/Member Equity> account, leaving the Draw account fresh at zero for the next year. At year end you are passing through the P or L to your 1040.

View solution in original post

john-pero · ‎December 10, 2018

You have it basically right. Any money you draw out of the business for personal use during the year is <Owner Draw>. Because of the nomenclature of LLC and that you are considered a "member" I always call it <Member Draw> but that is semantics as long as you know what you are dealing with.

I do directly "reduce" or reimburse the draw when I put money back in but to be accountingly correct you should have a corresponding <Owner or Member Contribution> equity account where all money in goes.

Yes, Member Draw is a negative number since it represents money taken out of the business.

Once a year, upon closing the books, <Member Draw> should, along with the fiscal Profit or Loss, get posted to the overall <Owner/Member Equity> account, leaving the Draw account fresh at zero for the next year. At year end you are passing through the P or L to your 1040.

mike16 · ‎December 10, 2018

So, normally if I were to just deposit personal money into the bank, for example, if I load my company $1000, that should post to the <owner equity> account correct? But, since I only have the option in the deposit screen to choose an account to deposit FROM, I was alright choosing the <owner draw> account correct?

In the end, depositing money to <owner equity> is the same as depositing money to <owner draw> no?

I have never balanced my equity accounts in the past.

john-pero · ‎December 10, 2018

Well, sort of, since it is all reflective of your equity, but closing profit to <owner equity> and keeping the draw separate, but closing it to <owner equity> will give you a much clearer picture of the health of the business, not to mention you may need to include your equity stake in an annual tax return

Keep <owner equity> as the overall equity account and I suggest only posting to it on an initial or annual basis. Add a <owner contribution> account if you want to keep draw in and out separate but in reality since the LLC passes through everything the draw is tantamount to an advance against year end profit pass through and a negative draw (money put back in) works just fine (and my tax accountant signs off)

mike16 · ‎December 10, 2018

OK, so my last question is: Was I correct when I deposited personal money, when having to choose the "account to deposit from", I chose "owner equity"? This is based on the fact that I do not currently have an overall equity account, I have only equity in, and equity out accounts.

qbteachmt · ‎December 10, 2018

"I was looking at my owner draw account in Chart of Accounts, and I noticed that almost all of the transactions are in the "decrease" column"

Taking funds = removing value. This is:

Assets= Liab + Equity

Removing asset = Decreases your Equity. Equity = Ownership Position.

"except for a few which are in the "increase column". The Owner Draw account is negative."

Don't worry about that negative. Run your Balance Sheet, to see the full picture.

You are overlooking that Net Income is contributing to Equity; you cannot see this by looking at your Infrastructure = chart of accounts. Run Reports. Like this:

I took $10,000 draw, so that is negative for the year. But the Balance Sheet also shows Net Income is $50,000. Total Equity = $40,000. My ownership position is fine. Equity can also be referred to as Net Asset (asset minus liability).

QB will "close" net income to Owner Equity for you. You can close Draws, as well, on the first date of your new fiscal year. That way, the Chart Of Accounts shows only the current year Draws.

mike16 · ‎December 10, 2018

Thank you.

qbteachmt · ‎December 10, 2018

"Was I correct when I deposited personal money, when having to choose the "account to deposit from", I chose "owner equity"? This is based on the fact that I do not currently have an overall equity account, I have only equity in, and equity out accounts."

Yes.

I see my additional answer previously provided has been marked Not Helpful. If something is not clear, please ask and don't Vote Down the input from volunteers. Thanks.

mike16 · ‎December 10, 2018

You've answered many of my questions on here, and frankly, you're brilliant. I had already chose another answer as being helpful before you posted yours. Unless there is a way to mark *both* answers helpful? I very much appreciate your time and knowledge.

qbteachmt · ‎December 10, 2018

Helpful is Up/ or Down. Recommended is different. So, Not Helpful is counted against our frequent flyer miles

fortunate1 · ‎February 14, 2020

Please ! How do I close out my "member draw" accounts at the end of the year ?

kmet44 · ‎September 19, 2020

Quickbooks has this TOTALLY Wrong!!

The Draw Account or Owners Draw is a Contra-Equity Account that should carry a Debit balance (not negative). Then at the end of each year you should make a journal entry to credit the drawing account then debit owners equity.

The removal of cash transaction is a debit to the temporary drawing account and a credit to cash.

EOY (End of Year) there is a credit to the drawing account & a debit to owners equity. Quickbooks should not be carrying a "negative" balance in this account this confuses the accounting equation immensely and is fundamentally incorrect. When you remove money using a draw account it should carry a debit balance as a contra account to owners equity

Teri · ‎September 19, 2020

Agree, equity is preferably credit balance and draws are contra-equity debits. Here is what I think is confusing since I just answered a similar question yesterday about reports, where it sounds like QBO went opposite of QBDT on how they present debits and credits on reports.

Suggest look at a different report than whatever you are using. COA is a list of accounts not actual report. Trial balance is my favorite report since it shows all your account balances on one page in account number order with columns for debit and credit to see the whole picture all on one page, without messy subtotals.

kmet44 · ‎September 19, 2020

Indeed but what I am attempting to do is a adjusting entry to a drawing account to reduce the prior period balance, yet the numbers are negative(credits) when it should be the opposite. That way I can credit the few account and debit the Owners Equity. I agree the trial balance is good but how can I perform a journal entry to reduce the draw account?

yumyb · ‎February 03, 2022

At the end of the year, How will members draw be zero?

yumyb · ‎February 03, 2022

How is the members draw zero at the end of the year?

SRosario15 · ‎January 17, 2023

Quickbooks Online does not list any Contra-Equity Accounts? so how would one record the Owners Draw in Quickbooks Online?/

Topics

Training

Community

Resources

Need to make sure I'm handling Owner Equity and Owner Draw correctly