Using Equity Accounts In QuickBooks

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Using Equity Accounts In QuickBooks

It is extremely important for business owners and shareholders to properly track the money they may contribute to the business or draw from the business. QuickBooks makes tracking these transactions easy once the equity accounts are properly set up within the Chart of Accounts. Whether someone is contributing money for a stake in the company or an owner is drawing funds out in lieu of payroll, equity transactions are important come tax time and for monitoring startup costs.

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Setting Up The Chart Of Accounts

Putting the proper steps in place when you start your books will lead to big benefits down the road. Your CPA will love you because you will be able to show them owner contributions and draws with a click of button and there won’t be any confusion as to where the money came from or where it went. QuickBooks automatically sets up a few accounts within the Equity category, but I always advise owners and bookkeepers to set up accounts specific to the owners and shareholders. Set up a parent equity account with the initials of each vested owner of the business, then set up two sub-accounts to show draws and contributions. It should look something like this:

Doing this allows for a QuickReport (control+ q is the keyboard shortcut for this) to be pulled in seconds and it is easy to decipher what money was contributed and what money was drawn. It may sound simple, but a startup business can tell you that money comes from many different directions when getting started and cash flow is tight.

Recently, I’ve seen start-up business owners put their personal credit cards, PayPal accounts, checking accounts on the books since these financial accounts are the main source of funding to cover startup costs. QuickBooks doesn’t handle Online Banking for equity accounts so these high volume credit cards, bank accounts, etc. need to be set up as if the company owns them, even though they don’t. If at some point the business is in a position to use its own internal funds, these account balances need to zeroed out and the accounts need to be made inactive. Booking an entry to these accounts against the owner equity contribution account allows the accounts to be cleaned up while still maintaining the accuracy of the startup costs. Since this is a non-traditional way to do bookkeeping, I prefer to zero these accounts out against owner equity on a monthly basis so there isn’t any confusion come tax time.

Many prudent business owners understand the benefits of tracking startup costs. Paying close attention to startup costs allows for easy growth and scalibility down the road. Not knowing how much was spent to get a business to the stage of turning on the lights and getting revenue is a big question mark for investors. Restaurant bookkeeping can be daunting, but it can pay off big time when a certain level of revenues and customer demand is met and new locations need to be opened. Restaurants especially have a tough task of opening new locations if the startup costs aren’t figured out. Being able to show investors a solid set of books with the exact costs to get a new location started speaks great volume.

The bottom line is that every business owner should treat their business as if it always needs to be investor ready and startup costs need to be tracked to the penny. Having a lackadaisical approach to this can really come back to haunt you in the future. Like most things in life, hard work in the beginning pays off big time down the road.

When you set up QuickBooks initially, a wizard guides you through a list of your company’s assets and liabilities. If you have any remaining funds from previous accounts, this money is deposited into the Open Balance Equity account. You can view your total equity by going to your Chart of Accounts and selecting the Owner’s Equity account. To record an equity deposit from another investment or account, you use the Opening Balance Equity account. If you have equity from a previous year that hasn’t been distributed to the business owners, you can use the Opening Balance Equity account to send the equity to the Retained Earnings account.

Owner’s capital includes any of the investments, profits, retained earnings and other funds that belong to the company owner. When recording owner’s capital, you can use a special account called an Owner’s Equity account to track all related transactions. If you need to pay yourself or another owner for funds taken from the general business assets, you can use the Owner’s Draw account to record any transactions. By keeping owner information separate from general company finances, it makes it easier to prepare taxes and track expenses and income.

How to Record Owner’s Capital in QuickBooks?

QuickBooks is the accounting software of choice for millions of small business owners, the ease of its use is often deceiving to some as the entry of transactions is a rather easy process that can end up being complicated by details. An example of this is in the entry of the Owner’s Capital into QuickBooks. Owner’s Capital refers to the amount of cash used as an initial investment in the company being started. It can be as simple as a cash investment or cash used to purchase assets or inventory. QuickBooks keeps constant track of the use of capital funds in a business.

OWNER’S EQUITY IN A SOLE PROPRIETORSHIP

Actually, tracking owner’s equity in a sole proprietorship is easy. You can use the single account that QuickBooks sets up for you, called Opening Bal Equity, to track what you’ve invested in the business. (You may want to rename this account something like Contributed Capital.)

To track the money you withdraw from the business, you can set up and use a new owner’s equity account called something like Owner’s Draws. Here’s an example of owner’s equity accounts in a sole proprietorship. Note that the numbers inside parentheses are negative values.

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OWNER’S EQUITY IN A PARTNERSHIP

To track the equity for each partner in a partnership, you need to create three accounts for each partner: one for the partner’s contributed capital, one for the partner’s draws, and one for the partner’s share of the distributed income.

Amounts that a partner withdraws, of course, get tracked with the partner’s draws account.

The partner’s share of the partnership’s profits gets allocated to the partner’s profit share account. (Your partnership agreement, by the way, should say how the partnership income is distributed between the partners.) Check out this example of owner’s equity accounts in a partnership.

As long as you keep things simple, however, you can probably use three or four accounts for your owner’s equity:

A capital stock par value account, for which you get the par value amount by multiplying the par value per share by the number of shares issued. The par value of the stock is written on the face of the actual stock certificate, and it’s stated in the corporate Articles of Incorporation.
A paid-in capital in excess of par value account for the amount investors paid for shares of stock in excess of par value. You get this amount by multiplying the price paid per share less the par value per share by the number of shares issued.
A retained earnings account to track the business profits left invested in the business.
A dividends paid account to track the amounts distributed to shareholders in the current year.