How to properly pay back personal expenses?
Flash619
Member Posts: 3
Currently I am in the process of reviewing and correcting past expenses for my LLC which recently is migrating to being a partnership.
The expenses were created in wave via uploaded receipts and the category set appropriately. The account (to keep track of what I owed myself) was set to Owners Investment / Drawings.
The issue I now face is that withdrawals from business checking for paying myself back, can not map directly to this account for several reasons.
- If I withdrawal from business checking to pay myself back, I need to define a category (i.e. owners equity) which throws off numbers on equity accounts even further.
- If I transfer the money from Owners Investment / Drawings prior to the business checking withdrawal, the money is never technically deducted from the business checking account in the journal, leading to incorrect asset totals.
- If I set Owners Investment / Drawing as the category on the expense transaction, I loose the ability to categorize my expense (i.e. legal fees) for tax purposes at the end of the year.
Since Owners Investment / Drawings is never technically withdrawn from, it just increases exponentially over time.
In the future we are moving to dividends accounts, so this should very quickly become a non-issue moving forward.
In this case, however, what would be the best course of action for these expenses, deposits, and withdrawals?
Comments
@Flash619,
An overview of the two transactions above. When an owner pays for business expenses with their own personal funds the background entry in accounting is debit expense or asset (depending on what it is) and credit owners equity. This increases the investment of the owner since they paid for items on behalf of the business. When an owner takes a withdrawal, the opposite occurs. You would debit owners equity or drawing and credit cash. Strictly a balance sheet transaction. Based upon what you mentioned, by uploading the receipts you have debited the expense and credited owners equity, which is correct. If you pay your self back through the business checking you would categorize the withdrawal as an owners draw. I'm a bit confused by the three examples you are providing. Owners Draw is an equity account and is not categorized. Second one, you do not transfer between checking and owner draw. Third one, your receipts categorized the expense, withdrawals are categorized as owners draw.
Since you mention it is now a partnership, I would recommend setting up an investment equity account for each partner and a distribution account (equity section) for each partner as well. To me a sounds like things may be a bit balled up. I'm available for hire to straighten it out. I work with clients throughout the US and an expert in partnerships.
I imagine my confusion is likely steming from how Wave displays this in the interface. You can set the account to Owners Investment / Drawing for the expense, however it asks whether it was a deposit or withdrawal. I'm not sure, since this is an equity account, which maps to credit and which maps to debit on that account. If I deposit into Owners Investment / Drawing, is that translating to a credit transaction behind the scenes on the equity account? Or is it translating to a debit transaction behind the scenes?
Previously these were all withdrawals, which caused the equity account to have a debit balance instead of a credit balance. I have since moved several to being a deposit into the account instead, which seems to result in a credit balance on the account within Wave.
A simple example for an expense,
A simple example for a withdrawal,
I'm hoping that my examples help explain a bit further. As I said above, it's hard to tell what Wave is actually doing behind the scenes.
@Flash619,
What Wave is doing in the background is posting an entry. In your first set, payment of expenses, you are uploading a receipt. The receipt represents the debit. You are either increasing an expense (like office expense) or purchased an asset (like a computer). This was paid for outside of the business. By telling Wave to use owners drawing that is where the credit is going. A credit to equity increases the owners investment. You would mark it as a withdrawal because the business made a disbursement. However, the disbursement did not come from business funds but rather the owner.
The second example is correct except some of the terminology you are using in item 3. Owners drawing is not an expense but rather a reduction in the owners investment. When Wave imports transactions from a bank to the checking account the deposits (in green) are debits to the account and withdrawals are credits (in black). On the transaction journal those debits and credits have already occurred and Wave is waiting for you to tell it where the other side of the entry should go. So if categorize a withdrawal as owners draw see a debit in owners draw on the balance sheet. You can see that it only affects the balance sheet. Debit owners drawing (you categorize) and credit (in black) cash (Wave imported), both balance sheet accounts.
@Mikeg
When I mark a business expense as a withdrawal from Owners Investment / Drawings, my trial balance then shows a debit balance on that account? Is that correct?
Are you saying each bank withdrawal from an owner requires two individual journal transactions? I'm still not sure how to properly lower the debit balance the Owners Investment / Drawings equity account from business checking withdrawals.
@Flash619,
I tried uploading a receipt, marked it as a withdrawal, coded it to owners equity and categorized the expense. It worked fine. There was an expense and a credit to owners equity. You do not need to make two journal transactions on your last point.
If equity is a positive number then it is a credit balance. If equity is a negative number then it is a debit balance.
You are welcome to post some screen shots or I may have some time later today if you want to add mike@mgfinancial as a viewer.