Expert: Arthur Naman - 7/1/2011

Question
QUESTION: I am working with an owner of LLC (temporary employment agency)that has been in business for 2+ years but has not generated a P&L or balance sheet. He is being asked for these reports from a new funding company. I have compiled his 2010 activity on a cash basis from his check book. My question is the reporting of the Balance Sheet. I know AR and Prepaids are excluded in a "Cash Basis" Balance Sheet but with low to no loans then the difference is shown as "members equity"? Should there be some amount for prior earnings and if so, would this be the amount shown on his prior years tax return?
Having experience in accrual method for large corps. I seek advice on preparing this balance sheet for this LLC.

Also, can you advise if he (sole member) should take a salary or an owner withdrawal and this show as a salaries expense on the P&L and if a withdrawal then shown on Balance Sheet only.

Thank you in advance; I surely will appreciate your response and any reading material you may direct me to read on the accounting entries of a LLC.
Thanks
Paul

ANSWER: My apologies; I thought I had answered this, but I obviously have not.

You mentioned he is a sole member LLC; is the business setup as a corporation on
the federal level? Normally sole member LLCs are sole proprietorship. If that is
correct, then owners do not take salaries. The reporting on an income tax return is a schedule C on the owner's federal form 1040.

The question regarding cash or accrual for a small business probably depends on
how the tax return is filed. Normally for small businesses with no inventory
cash basis is used.

Given the bookkeeping is done on the accrual basis and the tax return is filed on the cash basis, an accrual to cash conversion is used to convert to cash basis for reporting. The difference is *not* recorded as an entry to  members equity.

I am assuming that no tax returns have been filed for the past couple of years
as no P&L has been generated. Thus bookkeeping work needs to be done from when
the business began in business if that was before two years ago.

I expect you will have followup questions for this. Ask away.


---------- FOLLOW-UP ----------

QUESTION: Yes Arthur I do have follow up questions.
Your reply omitted the reporting on the balance sheet. Please see prior concern.
To follow up with reporting on the Balance Sheet - will the prior years profit / loss and the current profit / loss be reported?  

With the LLC being a sole proprietor the money disbursed to the owner for his personal expenses if not a salary then it would be labeled an "Owners Draw". Correct? If it is a draw, is the amount shown on the balance sheet included in the "Owners Equity" section not on the P&L?
I plan to report Balance Sheet on a Cash Basis.

Look forward to your response.
Thanks
Paul

Answer
Regarding reporting on the balance sheet, please consider an accrual to cash entry. That will take care of both entries to the P & L and the balance sheet.

The accrual to cash entries need to be done for all years, year by year.

It sounds like you are not familiar with accrual to cash entries. If that is correct, you need to seek assistance with someone you can discuss this with as it perhaps too extensive for doing it by allexperts. I would suggest you see assistance from a local college - the professors are usually quite willing to assist people.

As for distributions to the owner, yes they are labeled Owner's Draw. And, yes the owner's draw is reported in the owners equity section of the balance sheet.

If you wish the balance sheet to be on the cash basis, then both the P & L and the balance sheet need to be on the balance sheet.

Please continue to ask for assistance if needed.