Hi, I am a 100% shareholder of my s corp and I have been using QB to do the bookkeeping for the entire history of the company. My s corp finally made a profit and I have enough basis to distribute the profit out to myself. My understanding is that the profit can be retained in the company as "retained earnings," distributed out to shareholders as "distributions," or a combination of both. Therefore, a shareholder distribution should reduce retained earnings while keeping the profit for the year the same. This is not the case for my QuickBooks (2016 desktop version)... Regardless of how I change the shareholder distribution entry, "retained earnings" (a close entry) remains the same no matter how many times I refresh the report, as if QB is using the term "retained earnings" as "profits." Am I setting my QB correctly? Do you have the same problem? What should I do to make retained earnings adjust to shareholder distributions? Or is QB just calling profit "retained earnings?" If this is the case, how do I show in QB retained earnings in the sense of profit that is not distributed? Thanks!
Let's start from scratch, bring up the entry you made and delete it or void it if it was a check
use write checks, on the expense tab select retained earnings, and enter the amount, save
Open the chart of accounts and double click on the retained earnings account, the last entry should be a negative amount, same amount you entered on the check
if that is true, then everything is fine. If not what did it show?
s-corps have a requirement to use payroll for working shareholders before any distributions are made. I am not sure how that would apply if the corp is not making enough revenue to support the added costs of payroll. You need to consult with a tax accountant to find out what you need to do in this respect
Here is where you are confused: " Regardless of how I change the shareholder distribution entry, "retained earnings" (a close entry) remains the same no matter how many times I refresh the report"
You are looking for this in the Wrong Place.
"My s corp finally made a profit"
You need to run Three reports: Reports menu > Company & Financial. Run on Accrual Basis, for Last Fiscal Year:
Balance Sheet Standard
Statement of Cash Flows (no basis setting here)
They all show the same Net Income; that's how you know they relate. That Net Income is rolled into Equity automatically as of Jan 1 or the first date of your new fiscal year, so that income and expense start over at 0. This is the "Closing entry" that simply is the Math from Net Income that one day previous.
Your Distribution should be either taken from an Equity account you named Distribution to track it, or from RE when you issue the check to yourself.
"Therefore, a shareholder distribution should reduce retained earnings"
You control the Account you post it against. There is going to be a Warning pop up regarding posting to RE, but that is a Yellow Triangle. Keep going.
"while keeping the profit for the year the same."
Now it is time to run another copy of Balance Sheet, as of Jan 1, 2019 (of the first date of your new fiscal year). Customize, top left. Checkmark to include Prior Period.
As long as you have no Income or Expense activity dated Jan 1, you see that Net Income is 0 for the First date of the new year, and you see the Net Income from the prior date is rolled into RE for you.
And double-click RE from the Chart of accounts, make sure to set the date to All, and your distribution check should be listed here.
Please see my attachment.
"as if QB is using the term "retained earnings" as "profits." "
Equity means "Net Assets." Not Profit, only. The Accounting Formula is:
Assets = Liability + Equity
Turn that around:
Assets (what you own) minus Liability (what is owed) = Equity (Net Asset) and Net = Difference and Equity = Ownership position in the Company financial data.
How to record Profits/Losses from Loan Out S Corps, C Corps or LLCs in Personal books?
Should increase or decrease in Equity or Total Equity & Liability or Net Income be reflected in Personal books?
"How to record Profits/Losses"
Nothing about Loan Principal ever hits the P&L. The only Income would be interest Earned by the lender; the only Expense would be interest Paid by a business that Borrows funds to use for business purposes.
"from Loan Out S Corps, C Corps or LLCs in Personal books?"
Personal Books? The Person has debt. There is no expense write off for Personal Interest, and the Debt Principal is Liability, the same as their mortgage or their credit card balance or their vehicle loan balance.
"Should increase or decrease in Equity or Total Equity"
Equity is Net Assets; Assets = Liab + Equity, so being in debt Increases Liability and Decreases Equity. Paying down debt from Bank (asset) = Asset went down and Debt Liab balance went down. Equity is not changed.
"Net Income be reflected in Personal books?"
There is no Income from being in debt. Don't confuse Loan Proceeds and Income. Income is not the same as InFlow. Inflow comes from Sales, Wages earned, taking on debt, selling assets, etc. That is not Income, as a synonym.
"To answer your reply what do you know about a loan out corporation?"
I know that when working over a text-based internet forum, you need to use More Words. "loan out" is too vague and "corporation" is too vague. We don't even know which Country you are in, nor which program you are using.
Here's what I know: if you can map out the accounting requirements for the data flow, you can set up QB to do that, too.
And here is what else I know: Loan activities for the Principal are neither income nor expense for either party. The Repayment process explains why. Income and Expense means something related to Doing Business just happened = Income statement or P&L. Loan Principal explain that Value or Money just happened = assets and liability = Balance Sheet.
I am still puzzled. Why "Retained Earnings" is not reduced by amount paid from the Assets (bank accounts) to "Sharesholder's Distributions" ? It seems that I cannot do anything with ""Retained Earnings" in the "Chart of Accounts" except run a report. I do have a balance in the "Retained Earnings" but in the report it is blank...
Is there an answer on how to setup QB to do it?
Retained earnings is credit balance account (hopefully) of accumulated profit (or loss) earned on your Income Statement each year. QB makes that entry for you automatically, so no need to do entries.
Distributions is a debit balance account. So when you pay out Distributions, entry is a debit to your Distributions account and a credit to Cash account. So each each maintains its own running balance.
The credit balance in Retained Earnings ideally keeps growing each year that you make a profit.
The debit balance in Distributions account increases each time you pay yourself Distributions.
The net of the two is your Equity, whether you have amounts in one account or keep them in two.
Personally, I prefer to keep them separate so I can see how much profit I have earned over years.
Likewise, I prefer to be able to see how much I have taken in Distributions over the years also.
On my tax return, these two amounts are combined, but I like to keep visibility of both on books.
Just answered this question in greater detail for someone else, perhaps you can see if you click on me.
On other accounting systems, these two accounts are just called:
- Retained Earnings CY
- Retained Earnings PY
Where CY = Current Year and PY = Prior Years, for same reason.
I found how to do it: