Retained Earnings and Owner's Equity
SKN
Member Posts: 5
I've been searching and can't find a straight answer. On the balance sheet I see where Wave sums the totals for the year and puts all profit into the "Total Retained Earnings" row. That is great, exactly what I want. On the chart of accounts, I see the section for "Retained Earnings: Profit" and the default account "Owner's Equity" that Wave created for me. Also great, makes sense.
I have a multi-member LLC and want to distribute the earnings from 2020 to each member's capital account (additional Equity accounts I created on the chart of accounts). My assumption was that the retained earnings from the balance sheet for the year would be "in" the Owners Equity account, so I tried adding a journal entry to debit "Owner's Equity" and credit each Capital account. When I look at the account balance for Owner's Equity, however, it is showing a negative value.
The problem seems to be that Wave never actually credits anything into the "Owner's Equity" account, despite what is shown on the balance sheet. I understand the idea of Wave not "closing" the books on a prior year, but this seems to break rules of double-entry accounting. Am I doing something wrong? What is the correct way to disburse retained earnings at the end of a year?
Thanks.
Comments
@SKN,
Partner equity when presented on a financial statement is shown as one lump sum. For my partnership clients, we create an account for each in the equity section so that contributions/distributions can be tracked easily. Annual profits or losses are not allocated by partner. When you compare the partners equity on the tax return (m-2 or schedule L) it equals equity in Wave. Partners capital on the tax return is the sum of the individuals K-1's partner capital (capital by partner).
Hi @Mikeg, thanks for the reply. I understand your point about annual profits not needing to be allocated by partner, and about the total computed equity lining up to the tax forms. Overall the numbers do make sense. My confusion comes in how we are supposed to properly draw against the annual profits. For example, I want to make a distribution to each member to cover the pass-through tax burden that will be reported on the K-1s. I have a capital equity account for each member that currently shows their initial contributions. I have cash on hand from the 2020 profits. How should I properly record a check to Member A for $10,000?
Normally I would credit cash on hand and debit Member A's equity account. If I do that, it appears that they are taking $10,000 against their initial contribution, as the profit for 2020 has not been credited to them.
@SKN,
You can either post the cash distribution against the equity account that has their initial contribution or you can set up a separate equity account for Distributions Partner A. That way you are tracking all contributions and distributions separately by partner. Presenting the annual allocation of profit/loss can be done but it looks odd because the retained earnings remains but another equity account is created which offsets it so that retained earnings is zero. The other side of the of the posting is each partner account. Owners equity is used to zero out retained earnings and the offset is to each partner. It's extra steps that really aren't needed. First three are partners capital. Next is profit all prior years, then current profit, then the equity offset. Would look something like this.