Owner Investment vs Owner Equity
the_dadams
Member Posts: 1
I run my business as a sole proprietor and pay a handful bills from my personal accounts on behalf of the business. I don't understand if I should be recording these as "owner investment" or as income in the "owner equity" account.
- Is there a difference between these two accounts?
- Does the account "owner investment" represent my equity in the business from these bills I have paid? or should I create a transfer from "owner investment" to "owner equity"?
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Hi, @the_dadams!
First, let me direct you to the workflow we recommend for handling paying business expenses out of a personal account. You can find it here.
And now that that's out of the way, Equity versus investments/drawings. Each has a different name, but essentially serves the same purpose: whenever a transaction is categorized as one of the two, it will be counted as an equity transaction.
The reason that they are distinct has to do with specificity; if you are investing or taking money from your company, this transaction should appear under 'Owner Investment / Drawings' so that your reporting can reflect the nature of the transaction. For all other situations that require the 'Owner's Equity' distinction, but do not represent a deposit or withdrawal, the other account can be used.
The "Owner's Investments/Drawings" represent all money that you take out of your personal pocket and invest in your business, or that you take from your business to keep for yourself. This can absolutely include purchases that you personally pay for your business. No transferring necessary.
alexia, i think you made a mistake. Did you mean owner equity in your 3rd paragraph? So to get this straight, Owner investment = when you put money into your biz account from your personal account. Owner equity = ?
Hi, @janelikesme,
No, it's right, although it's fair of you to say that I could've been clearer about the distinction. I'll try to do so now.
The "Owner's Equity" account is more of a catch-all account for anything that would fall under the "Equity" account type that isn't covered by "Owner's Investment/Drawings".
As it's set up in Wave by default, the Owner's Equity account would have the same role as a "Retained Earnings" account. It's a place where to move the balances of your income and expenses when closing out your books for a given period. This isn't actually necessary to do in Wave, but we do provide the account to do so if it's how you want to handle your accounting come year's end.
ah gotcha. thanks alexia!!!!!
Hi there,
This was very helpful thank you. Just had a follow up question:
My business partner and I each made an initial deposit into our business account when we opened it. They are technically loans of each of us to be paid back when the business is profitable with no real expectation at this point that they will be paid back any time soon. I have made a new category in our Wave account called 'loans' and that's how I've categorized them. Should I change that categorization to Owner Investment?
Hey there @Inscapes
Let me start off by saying this question might be best handled by a CPA.
However if I were to offer my advice, what you could do is create two equity accounts called Owner 1 loan, and Owner 2 loan. Your initial debit ↓ to these accounts will reduce them by whatever amount you put in. But if you want these to balance, every time you pay the funds back in small increments once your business is profitable, you will see that your equity accounts will eventually balance over time.
Since it's equity, (money not earned by your business itself) it's wise to keep it categorized as this so that your profit and loss doesn't show up as owing money or earning it through your business if this makes sense.
Hi @Alexia - The link you included here is broken. Can you please point me to the correct link?
"First, let me direct you to the workflow we recommend for handling paying business expenses out of a personal account. You can find it here." https://support.waveapps.com/hc/en-us/articles/208622836-Handling-Business-Expenses-With-a-Personal-Bank-Account
Thank you!
Sean
Hey @Sean123 , this is the updated article. Thanks for letting me know about the link!
HI Alex, the article you linked is paying personal expenses out of a business account. The discussion is about paying business expenses from a personal account. Is there another article?
Hey there @Samalam
To show a payment from business A to business B, you would need to categorize it as an Owners Investment/Drawing depending on the account you're in.
Hello @AlexL @Barsin @Alexia before setting up a business bank account, both my business partner and I have been paying for expenses out of pocket. Thankfully, we've kept our receipts. Based on the above it sounds like you would recommend categorizing these receipts as "Owner's Investment's / Drawings". My question however is - how can we distinguish which receipts are my business partner's and which are mine? Once our business becomes profitable and we move money into retained earnings, will the "Owner's Investments / Drawings" be paid down?
Thank you!
Hey there @SoulJam !
Thats correct, "Owner's Investment's / Drawings" would be the way to go in that case. We have a Help Center article you can check out with more information here as well. However, to differentiate your receipts from one another, there is no functionality in Wave to record this. There is a workaround available though. What you can do is leave a comment in the appropriate transaction's "Notes" section and/or edit the transaction description to easily identify who paid for what. Below I attached a screenshot for reference: