Properly Recording Owners Equity and Drawings

Ltkenbo

So I run a small business with a partner and we have just starting using Wave. We run an LLC so our income is pass through and so we periodically distribute earnings from our Business bank account linked in Wave to our personal bank accounts (not setup in Wave).

I am a little confused on how to properly record all of this. For example, there is an equity account called "Owner Investment / Drawings" that seems to be used for this purpose. When we do a periodic payout to each other using a bank transfer, on the actual transaction, I can categorize it as "Owner Investment / Drawings" which will debit that account. This makes perfect sense.

So how would I properly credit this account? Or another way of phrasing this, how should I properly record what is owed to each partner? Would I simply create two of these investment/drawing accounts, one for each of us, and create journal transactions over time to debit our "Sales/Income" account and credit the investment accounts? Maybe there is a better way to do this but I can't see one at the moment.

Alexia

Hi, @Ltkenbo,

Before going any further, I want to make a note that accounting for shareholder dividends is tricky accounting, and I would strongly recommend looking this over with an accountant before committing to handling it following my suggestions. While I'm confident in using Wave, I do not have the same expertize an accountant does.

With that said, let's get into it.

Setup

You'll need to create a few new accounts on your Chart of Accounts first. You'll need a liability account called "Dividends Payable" for each of those shareholders, using the "Due to You and Other Business Owners" account type.

The workflow

1. First, you'll have to move the income and expense amounts you want to payout (so everything up to a certain date of your choice) to the "Retained Earnings/Deficit" account. You'll have to do this through a journal transaction. You'll debit your income accounts and credit your expense accounts for the amount in question, and then enter the difference to Retained Earnings to make your journal transaction balance.
2. Then, you'll make another journal transaction that debits Retained Earnings for its current balance (assuming that it's positive) and credits each of your Dividends payable accounts for their share of that profit.
3. When you pay those shareholders, simply make an expense transaction on the Transactions page from your business' bank account and categorize it to each shareholder's Dividends Payable account.

Let me know if you have any questions!

hong

Hi there,

I am in a similar situation as the OP.

After reading through the suggested solution, I will like to check if my below-proposed steps are correct, please.

1. Say the business agreed to $50k for withdrawal for my partner's profit sharing at the end of the year.

2. Use journal transaction to move $50k into "Retained Earnings: Profit -> Partner Equity" account.

3. Use journal transaction to pay from "Retained Earnings: Profit -> Partner Equity" account into "Partner Dividends payable" account.

4. "When you pay those shareholders, simply make an expense transaction on the Transactions page from your business' bank account and categorize it to each shareholder's Dividends Payable account."

I am confused about this statement. If I have already used journal transaction to pay from "Retained Earnings: Profit -> Partner Equity" account into the "Partner Dividends payable" account, do I still need to make another expense transaction from the business' bank account?

Samd

Hey @hong - we definitely aren't accountants, but I can confirm this should be the proper workflow in Wave. You shouldn't need to make a separate expense deduction from the bank account however as this money should already have been moved into the Partner Dividends payable account so everything should be set in this case.