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Profit distribution

Pearlrush ServicesPearlrush Services Member Posts: 8

I am clsoing my 2017 ac. However, how can I record transaction if my business is ready for profits distribution to partners? We cant key transaction with "previous year(s) earnings" to distribute those profits earn it the year.

in Accounting Technical Support

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  • CharlotteCharlotte Member Posts: 671 admin

    Hey there!

    We do not close out year-end. Unlike some other systems of its kind, in Wave you can pull up reports and make adjustments at any time. This means that your previous years do not explicitly close and lock you out. All that happens at year-end is that current year earnings get zeroed and added to previous year earnings.

    Beginning the new fiscal year, you'll see the new previous year earnings balance, income and expense account balances, and bank account balances. There isn't an overarching account (retained earnings) to which you can post transactions.

    Instead of creating a JE using a retained earnings account, you could record an income transaction at your end of year, which will be included in previous year earnings.

  • Mohamed Imran Buhary Seyed MohamedMohamed Imran Buhary Seyed Mohamed Member Posts: 25 ✭✭

    Profit Distribution can be recorded as a withdrawal from the Business if you are actually taking out the money. Simply add a payment transaction to the partners and Debit their Respective Current Accounts. Thus you will see the net Retained Earnings + Current Accounts reflect proper position after profit distribution.

  • Mohamed Imran Buhary Seyed MohamedMohamed Imran Buhary Seyed Mohamed Member Posts: 25 ✭✭

    @Pearlrush Services said:
    I am clsoing my 2017 ac. However, how can I record transaction if my business is ready for profits distribution to partners? We cant key transaction with "previous year(s) earnings" to distribute those profits earn it the year.

    I advise you to post the Profit Distribution entry in Each year (best is on your last day of the Fiscal Year) as follows:
    Debit - Profit / Earnings Distribution Account (you need to Create this account under "Equity and Retained Earnings Category)
    Credit - Partners' Current Account

    And if the Payment also can be posted the same day or later:
    Debit - Partners' Current Account
    Credit - Cash on Hand / Bank Account

  • LAYERcLAYERc Member Posts: 9

    Are these the same steps for a sole-owner LLC taking an owner distribution(draw) ? Can you walk us through where to click within WaveApps?

  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi, @Layer9IT.

    In that case, you can just make an expense transaction from your company's bank account to Owner's Investments/Drawings.

  • SUDH1010SUDH1010 Member Posts: 1

    I have a some doubt. Our company having four partners. They took equal amount Rial Omani 10,000 as partnership withdrawal this August our net profit was as on 30.6.2018 Ro 1,000,00 . Our retained earnings was for the year 2017 Rial Oman 34,000. I passed below journal entry for each partners
    Dr partners current account
    Cr Bank (payment was cheque payment)
    Now I am having one doubt when i want to show journal entry for retained earnings distribution for this withdrawal? withdrawal date or end of December 2018?. Is it necessary for retained earnings distribution entry or not? If I am not passing retained earnings distribution entry (for this partners withdrawal) what will happen?

    Please advise me

    One more question Our other one company was loss for the year 2017.can you please give me journal entry for how to transfer this loss to retained earnings? I mean if company made profit we will transfer this net profit to retained earnings. Same like how will do this net loss entry?. Can you please reply?

    edited August 26, 2018
  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi, @SUDH1010,

    Wave doesn't a retained earning account by default. You can read Charlotte's reply from earlier in this discussion for more information on how Wave handles year-end. If you would like to combine all of your earnings into a single, it'll have to be done manually.

    In your case, you would simply create a withdrawal categorized to the right account. The date for that transaction would be the date of the withdrawal. If you're unsure about how this would interact with your local tax administration, I recommend discussing this with an accountant. They'll be able to help you best.

    Onto your other question. In combining all of your past numbers into a Retained Earnings account manually, you would also combine the balances of your expense accounts. The amount would simply be negative at the end of the year. The journal entry would look like this:

    • If your Retained Earnings are going up Credit this account for [the total of your income balance] - [the total of your expense balances]. If they're going down, debit Retained earnings by [the total of your expense balances] - [the total of your income balance]
    • Credit each expense account for their respective balance
    • Debit each income account for their respective balance.
  • MontiCoMontiCo Member Posts: 12

    @Alexia and @Charlotte - I am tryng to fix mistakes from 2017 closure.
    Following Charlottes input above, I did a journal transaction BACK-DATED 31 DEC 2017:

    • Dr Retaining Earnings / Deficit (System account) by "X amount"

    • Cr Dividends declared (default account) by same X
      Then I closed the bank account transaction of the outgoing wire transfer against the 2017 account dividends declared.(transaction also for X amount)
      As a result TODAY's Balance Sheets looks as follows:

    • "previous year(s) earnings" amount is the same as before doing the above adjustments, and not deducted by the 2017 dividends paid out

    • :"Dividends declared" account balance is ZERO
    • "Retained Earnings/Deficit" account shows a negative amount equal to the "X amount" paid out as dividends
      This situation does not look correct to me, as I suspect debiting the retained earnings account affected only this year's balance without affecting previous years' earnings (despite the 31-DEC date of journal entry), while it should show the difference between previous years earnings and declared (and paid out ) dividend amount (the actual retained earnings).
      Can you please let me know your opinion on the above and where I may be doing wrong?

    Many thanks for your support and I look forward to your input.

  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi, @MontiCo,

    I'll start by saying that accounting that involves dividends and profit distribution among shareholder is advanced accounting. While I will do my best to help, I do recommend you check in with an accountant. They would have a much better idea of how to fix issues in your books than I would.

    Let's go through this point by point.

    1. Your "Previous year's earnings" would not have changed, because it's a total of the balances of your income accounts and your expense accounts. The two accounts your mention are of different types (Retaining Earnings is an equity account and Dividends Declared should be a liability account). Changing anything to either of these accounts won't change your earnings.
    2. Yes, because it's a liability account. When you credited it in your journal entry from earlier, it raised the balance (so you owed a higher amount). The payment categorized to it brought that balance down to zero. The payment account for the actual payment should be the company's bank account.
    3. Was it used as a payment account for the dividend payment? That would explain why it was essentially charged twice.

    In essence, you should have two transactions here.

    • One that debits X to your Retained Earnings and credits X to Dividends declared.
    • One that debits X to Dividends Declared and credits X to your bank account.
  • MontiCoMontiCo Member Posts: 12

    Hi @Alexia,
    Many thanks for your reply.
    All your answers check, and with reference to your last 2 bullets:

    • I have first transaction: OK
    • For the second one, sorry but I need more wave-expert input.
      I tried your solution (debit dividends, credit bank) but it clashes with the transaction recorded in the bank account.In fact, at that time I wired amount X from the company account (so I credited / decreased the company bank account) to my personal account at another bank. Then, when the company bank transaction for amount X came into wave, I modified as follows: Category=declared dividends, Account=the corresponding bank account.
      This makes declared dividends correctly balanced (zero), bank account reflecting the correct balance, but retained earnings remains unbalaced (minus amount X).
      It looks like "retained earnings" is NOT WHAT IT SHOULD BE. By your definition and other accounting manuals "the amount of a corporation's retained earnings is the cumulative net income since the corporation began minus all of the dividends that the corporation has declared since it began". However, in my Wave it is an account with a starting balance zero, and NOT THE SUM OF ALL INCOME. Hence when I debit it against the delcared dividends, itis balance is minus amount X. Conversely, "Previous year earnings" is automatic and locked (I cannot debit / credit from that account to retained earnings).
      So my confusion is between "retained earnings" and "previous year earnings" accounts, and what does what.
      How do I credit the retained earnings account against the earnings of 2017 to balance it against the dividends paid?
      Again sorry for wordy request, but I would really appreciate if you could clarify how Wave works so that I can possibly discsuss with an accountant.
      Thanks a lot!
  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi, @MontiCo,

    The part you're missing here, I believe, is that you need to move the money from your income and expense accounts to a Retained Earnings account manually. Wave does not do this automatically. What you have to do is use journal transactions to move the balance of each of your income and expense accounts at the end of 2017 to that Retained Earnings account. Then, you'll be able to use that account to distribute Dividends Payable. I explained how to do this earlier in this thread.

    "Previous Year's Earning" in Wave isn't an account, but a shorthand to make it easier to keep track of amounts that come from previous years. It gives you a summary of your expenses and income from that year but doesn't actually contain those amounts.

    Once you've moved all of your 2017 income and expenses to the Retained Earnings account, you'll be able to complete this process.

    Does that all make sense? Let me know if you have further questions.

  • MontiCoMontiCo Member Posts: 12

    Thanks a lot @Alexia, it does makes sense and it is exactly what I was missing. I am implementing your recommendation shortly and figers crossed, will let you know if I encounter any issues!
    Cheers

  • twogbtwogb Member Posts: 2

    Hi,

    I have a multi member LLC and in wave each member has their own owner equity account. When a member puts in capital I will CR the equity account and DR the bank account. If the owner takes a distribution then DR bank and CR owners equity account.

    My question is how do I allocate profits (or losses) to LLC members. Let's say for example the business makes a profit and each member get's $1,000 of that profit as per the operating agreement. One side of the entry is I would CR the owner equity account. Where would the DR go (considering at this point it's just an allocation and not a distribution)?

    Thanks for any help on this.

  • EmmaPEmmaP Member Posts: 639 ✭✭✭

    Hey @twogb! Thanks for reaching out! I've merged your post with a previous community thread on the topic. You can search the thread to see if the recommendations here work for you and your business :)

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