After tax earnings...what to call them?

[Heido]

At the end of the year, we had paid all our taxes and had money left in the account. This was our after tax profit. I moved some of it out of the account, but didn't know what to call it. Should I make a new account name for that money and how do I keep track of it so we don't pay tax on it again?

Hope this makes sense,
Heidi

[suzannemead]

Net profit that you paid taxes on will zero out at the end of the accounting year. Each year you start over with profit or loss accounts. The only accounts that carry a balance forward are assets, liabilities, and equity. Depending on you company structure you may need to transder the profit/loss to an equity account. Your accountant should be able to tell you what you need to do, if anything.

[lisa_mn]

The money in the bank really has nothing to do with the net profit on your Profit & Loss. You don't pay taxes on that amount, you pay taxes on the difference between income and expenses as reflected on your profit & loss statement.

QB will automatically move the net income for the year to retained earnings on the balance sheet as of the first of the following year.

As for taking the cash out of the business, it depends on what type of entity you are. As Suzanne said, you should probably confer with your accountant.

[suzannemead]

Lisa - I was assuming the person meant a balance on the "bottom line", rather than money in a bank account. Glad you picked that up if, in fact, they meant the bank account. ;)

[lisa_mn]

Well, we'll see! Heidi?

have a great weekend Suzanne!

[Heido]

Actually, the money is in the bank account and we are drawing from it. I did transfer out some cash into a personal account (the after tax profit).

So, should the money I transfer out be called retained earnings?
Should I just keep track of the money we were left with after our tax season???

Heidi

[suzannemead]

The bank account just goes on into the new year. You don't do anything with the balance in it. If you took money out, and you are a sole proprietor, just post it to the Owner's Draw account. The Retained Earnings account is an account that Quickbooks creates where the profit or loss from each year is transferred, so you start fresh on a new profit and loss each year. Let's say you had a profit of $5,000. the first year. At the end of the year the profit and loss account balance will transfer to Retained Earnings. In the second year let's say you had a loss of $2,000. That loss would be transferred to Retained Earnings, making the balance in that account $3000 ($5,000 for the first year less $3000. loss for the second year). Neither of these accounts has anything to do with the money in the bank.

[lisa_mn]

I wouldn't pull it directly from retained earnings - I would set up an equity account called distributions or draws or something like that. This works for most entities.

If you're a C-corp by any chance, it would be dividends and the corporation would have to issue you a 1099-div and you'd report the dividend income personally. But I suspect that's not the case.

What type of entity are you?

[lisa_mn]

Suzanne - we were typing at the same time!

[suzannemead]

Two minds with but a single thought! or Two great minds think alike! We have our answer and it seems both of us were right - you were thinking "bank account" and I was thinking "bottom line".

[Heido]

Wow, thanks ladies, you are both fast and furious!

We are an S-Corp. I was thinking of creating a different account for the money but I still need it to stay in the "checking" account so we can pay bills from it. I think it would get confusing if I was paying vendors from an equity account.
We should not be reporting it as income next year, because we already have for the 2006 tax year. So, it's free and clear at this point. I did transfer some of it to our personal account but wasn't sure what to call it. The term retained earnings didn't match up with what the money actually was.

Heidi

[lisa_mn]

Repeat after me: Cash in the bank does not equal profit, cash in the bank does not equal profit.

If you borrowed $10,000, you'd have $10,000 in the bank but no profit.

If you spent $10,000 on a piece of equipment, you'd have $10,000 less in the bank, but you wouldn't have affected your profit at all.


You don't have to "do" anything to the money in the checking account, unless you take it out.

That's when you want to code a withdrawal to a distribution account.

Does that make sense?

[wolf]

As an "S" corporation...you receive a K-1 form and whatever profit (not cash) the corp has made during the year gets paid by the partners/owners of the S Corp as individual income.

Plan ahead with an S corp..

hope this helps