Expert: Shirley McAllister, CPP, PHR - 10/2/2008

Question
Shirley,

Hi.  First thank you for making you time and talents available to me a perfect stranger.

I am a partner in a small business and I am unfortunately the designated bookkeeper.  My partner and I each contributed 25K in startup costs at the beginning of the year.  I posted this to two separate sub-accounts of my accounting software built-in owner equity account and both reflected a positive balance of 25K.

Over the time we have both taken some of our money back out of the business.  I posted these transactions against the owner equity account which reduced the amount each time.  We have now both taken our initial 25K back and the
owner equity account value is Zero.

We would now like to take some more money out of the business as wages (income, salary or whatever it would be called).  I don't know how to do this other than to continue take the money and post it against the owner equity accounts.  The part that confuses me is this action results in a negative balance in the owner equity accounts.  I am not an accountant and in my inexperienced mind I don't understand how this all fits in the grand scheme of bookkeeping.  I understood the positive balance to mean that the business "owed" us money.  It would seem that with a negative balance would me that we now "owe" the business money.  I don't foresee ever adding personal funds into this business again so as we earn more the balance in the owner equity account would grow larger and larger.

Do owner equity accounts get zeroed at the start of a new year?  Am I going about this all wrong and is there a another more proper way of a business owner taking some income out of a business for personal use?

Thanks.


Answer
You should have an owner's draw account. This account SHOULD be negative as a result of writing a check. This account means that you are taking money out of the business and thus reducing the "equity" or available cash/assets that the company has.

Owner's Draw and Retained earnings should 'close' to the Owner Equity account on Jan 1st.

You should have the following accounts in Equity -
1. Capital Investment - the money that you invested in the company
2. Draw Account - the money that you withdrew from the company
3. Retained Earnings - created to accumulate past earnings and losses
4. Net Income/Loss - created to reflect current year income or loss

When you shift the date from 12/31/08 to 01/01/09 on your Balance Sheet, you should notice no difference in Capital Investment or the Draw Account unless you made an investment or took a draw on 1/1. However, you will see you net income or loss move from the Net Income/Loss account into Retained Earnings.

This is how it works in Quickbooks, I am not an accountant,just an HR Director, but this should explain the process.

Shirley