Announcement

Collapse
No announcement yet.

Retained Earnings and S-Corp Distributions Accounting

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Retained Earnings and S-Corp Distributions Accounting

    Hello,

    I have a S-Corp. I take reasonable salary and then some as distributions. I have created an equity account to record these distributions.

    in 2012 (example), I had a total revenue of $120,000. Total deductible expenses of $100,000 (which includes salary). That leaves my net income as $20,000. I take that entire net income ($20,000) as distribution. Here I assume that my retained earning at end of 2012 should be same as that at the beginning of 2012. Correct? Since I did not leave any profit in business there should not be any change retained earnings. Is my understanding correct?

    This is what confused me - If I punch my numbers in TurboTax Business, it calculates that my retained earnings at end of 2012 are exactly same as that in the beginning (no change). However, if I do a quick report of Retained Earning account from Chart of Accounts (cash basis), it shows that my retained earning at end of the year are $20,000 more than that at the beginning. Basically QuickBooks does not take into account distributions while calculating closing entries for retained earnings.

    Am I missing anything? Am I not accounting distributions correctly (I account them in an equity account).

    Thanks
    Yogi Watcher
    Thanks and Regards

    Yogi Watcher

  • #2
    Remember that QuickBooks is a double entry accounting system, even though one entry is usually done behind the scene. When you take cash from the business, how are you showing it coming out? As a credit to cash using a General Journal entry? By writing a check to yourself? In either case, the debit entry must be to the Retained Earnings account in the equity section of the chart of accounts.

    If you use a General Journal entry, the debit is to retained earning and the credit is to Cash.

    If you write a check, make sure the "expense" points to the retained earnings account in the equity section of the chart of accounts.

    In either case, only Balance Sheet accounts are used. There are no Income Statement accounts involved.
    Lorin Browning, Ph. D.
    Fellow -- National Tax Practice Institute
    lorin@lorinbrowning.com

    Comment


    • #3
      When I take distribution, I write a check to myself. In QuickBooks, I record it as a withdrawal from my business bank account into the "Shareholder Distribution" equity account.

      I think what's missing is the year end transaction to close (zero-out) the "Shareholder Distribution" equity account. This transaction will move the year end balance in "Shareholder Distribution" equity account into the Retained Earnings account. This will reduce retained earnings by the amount of distribution.

      Does that make sense?
      Are manual entries into Retained Earnings account allowed?
      Should this closing entry be at the each year end, or each month end, or the same day when distribution are made.
      What's the best accounting practice here?

      I think this is essentially what you are suggesting. Except, you are suggesting that the distribution should be recorded as withdrawal from my back account into the retained earnings directly (bypassing a separate "Shareholder Distribution" equity account). I prefer to maintain separate "Shareholder Distribution" equity account, so I can track distributions.
      Thanks and Regards

      Yogi Watcher

      Comment


      • #4
        I posted the closing transaction from "Shareholder Distribution" to "Retained Earnings" to zero out "Shareholder Distribution" account at EOY. That seems to be working well. Reports are clean.

        QB does warn me that manual transactions should not be posted to "Retained Earnings" account, but it does let me do so after accepting the warning message.
        Thanks and Regards

        Yogi Watcher

        Comment


        • #5
          What is best accounting practice here?

          Should I make one closing entry at end of year for sum of all distributions for that year? or

          Should I make one closing entry at end of month for sum of all distributions for that month? or

          Should I make closing entry on the same day I take the distribution?
          Thanks and Regards

          Yogi Watcher

          Comment


          • #6
            Instead of using Retained Earnings to zero the "Shareholder Distribution", create an Other Expense account "Distribution Expense" and use it on the last day of the fiscal year. This will show on the P&L and will be reflected in the Retained Earnings equity account.
            Joe Williams
            joewilliams@wavelinx.net
            Piedmont, Ok

            Comment


            • #7
              Thanks Joe,

              If I zero out "Shareholder Distribution" against the other expense account, then my net income figures are distorted and they don't match with my business tax returns schedule M-1. Basically my net income figures are reduced by the amount of distribution.

              Am I doing something wrong?
              Thanks and Regards

              Yogi Watcher

              Comment


              • #8
                Make the journal entry to Debit the Retained Earnings on the first day of the new fiscal year and ignore the warning about making entries to Retained Earnings.
                Joe Williams
                joewilliams@wavelinx.net
                Piedmont, Ok

                Comment


                • #9
                  Joe,

                  I am now confused.

                  Are you suggesting that (your earlier post) I should create and use "Distribution Expense" to zero the "Shareholder Distribution" at end of the year. And then at start of the next year make a journal entry to Debit the Retained Earnings against "Distribution Expense"?
                  Thanks and Regards

                  Yogi Watcher

                  Comment


                  • #10
                    Use the use "Distribution Expense" if you want to show the distribution in that fiscal year.
                    Use "Retained Earnings" on the first day of the fiscal year if the distribution is from the previous fiscal year.
                    Joe Williams
                    joewilliams@wavelinx.net
                    Piedmont, Ok

                    Comment


                    • #11
                      Please bear with me while I get this right in my head.

                      I can use "Distribution Expense" account - This will show distribution as expense in PL report at the cost of distorted net income figure which won't match with M-2. But "Retained Earnings" account report and BS report would be correct and will match with schedule L.

                      Or

                      I can use "Retained Earnings" account on start of the fiscal year - This will show distribution as separate entry in BS report. But Retained Earnings entry in BS report won't match with schedule L.

                      May be I am just thinking too much into this:-). It seems that either way there will be something that won't be right and will require some number crunching.

                      Thanks for your help.
                      Thanks and Regards

                      Yogi Watcher

                      Comment


                      • #12
                        I think y9ou guys are making this way to complicated.

                        The way I do it: (S-corp or LLC)
                        First, the check I write to myself or any stockholder has nothing to do with expenses. You are merely withdrawing money from the company bank account. I have a subaccount(called UBI) under the equity accounts for each stockholder. When the stockholder takes money out I debit that account and credit the bank account.

                        None of these entries should affect RE.

                        At EOY+1 day I credit the stockholders for their share of the RE and debit RE.
                        It's done.. (Still nothing to do with P&L)

                        Hope I understood the situation!!
                        Colorado Springs and Eastern Washington
                        QB Pro 2018 used for two farms and personal

                        Comment


                        • #13
                          That's exactly what I did. Except I credited Shareholder's Distribution account (and debited RE) on EOY instead of EOY + 1 day.

                          Does it really matter if that closing transaction is on EOY or EOY + 1 day?
                          Thanks and Regards

                          Yogi Watcher

                          Comment


                          • #14
                            Well the reason for the +1Day is because RE belongs in the year in which it has been earned.

                            So, after the completion of the year the stockholders now own their share.

                            It just seems that it should be that way to me, I don't really know if there is an accounting rule regarding that or not.
                            Colorado Springs and Eastern Washington
                            QB Pro 2018 used for two farms and personal

                            Comment

                            Working...
                            X