New Wave: Difference Between "Business Owner Contribution & Drawing" vs "Retained Earnings"?

SBP_PWS

My wife and I own a small business together, and for federal tax purposes we are considered a partnership. I am looking at the new wave Chart of Accounts in the equity section, and I wonder if I am not doing the draws and distributions correctly. It looks like equity is now broken into two categories - see what is circled in red in this screen shot:

What's the difference here between the "Business Owner Contribution & Drawing" and the "Retained Earnings: Profit" ? So we have two partners - Should I be debiting the same partner's account for investments and crediting it for distributions? Or should each partner have two accounts - one for investments and one for distributions?

gabrieltomescu

@SBP_PWS Yes, you can use the same account for both investments and drawings. If you have two partners, I would recommend creating an account for each partner (e.g. Joe Smith - Contribution/Drawing, Mary Smith - Contribution/Drawing), so that you can better separate your transactions.

SBP_PWS

Thanks for the tip! So, that leaves one thing to clarify... If I record our initial investment into that account (one for each owner/partner) and then record subsequent draws, it makes the equity account negative because now our draws are coming from profit instead of the contributions we originally put in. For tax purposes we are a partnership, so we are careful to report all profit on our taxes - but we don't actually take the cash out of the business. Should we be doing something like distributing any remaining profit on December 31st and then reinvesting it as a new contribution on January 1st? I feel like I'm missing something, but that's the only way I can think of that would keep our capital account reporting accurate without actually taking the cash out of our business checking account.

Mikeg

So if I understand correctly, your contribution/drawing is negative. If you are generating profits, which I assume you are in order to continue taking draws, then your retained earnings would be positive. If you net the accounts together you should get partner capital. The accounts you are referring to are cumulative in Wave. They do not close out every year. You would need to do a journal entry every year if you wanted to match your K-1 capital. However, it is not necessary. So long as the equity nets to the sum of the K-1 capital (assuming same accounting method) you are fine. I work on a lot of partnerships and none of them close out the equity section on an annual basis.
Regards,
Mike, CPA