Question on LLC member distributions w/o closing books

Buddha Buck blaisepascal at gmail.com
Sun Feb 22 14:09:27 EST 2015


If I understand the question properly, I don't think it's so much a
question of how to handle the owner's draw, but rather how to "replenish"
the owner's equity accounts.

I mean, let's say there is a business which has run for years and never
"closed the books". The balance sheet says there's $100K in assets, $10K in
liabilities, $5K equity for each of 2 owners ($10K total), and $80K in
retained earnings.

If one owner takes a $10K draw, twice his original investment, that's OK
since his share of the business is $45K.

But that would leave a balance sheet of $90K in assets, $10K in
liabilities, $5K for one owner, -$5K for the second owner, and $80K in
retained earnings.

This is accurate, but it looks weird. It would look better if the retained
earnings were distributed among the owner's equity accounts. But retained
earnings is not a "real" account, it's a pseudo account computed from
income and expenses.

So what's the best way to distribute retained earnings without closing the
income and expense accounts?

I can think of a couple of ways:

I) Create an Equity:Distributed Earnings account, intended to have a
negative balance, which distributions come from. It offsets the retained
earnings. So in this case, the balance sheet would say $25K for owner 1,
$15K for owner 2, $80K in retained earnings, and -$40K for distributed
earnings. The total equity is still $80K, but more money has been
distributed to the owner's accounts (if not pockets) than before.

II) Create Equity:Owner n:Distributions sub-accounts, with a negative
balance, to offset the owner's equity, In that case, the balance sheet
would say $5K for owner 1, $5K for owner 2, -$10K for owner 2
distributions, and $80K retained earnings.

There may be better ways.

On Sun Feb 22 2015 at 1:43:34 PM Edward Doolittle <
edward.doolittle at gmail.com> wrote:

> I've been following this thread with interest, and I'd like to check
> whether I understand.
>
> What you are talking about is called "owner's draw". Depending on the tax
> regime, owners should extract profit from a business by drawing down equity
> rather than through a salary (which would appear on the business books as
> an expense) because owner's draw does not impact the profit (income -
> expenses) of the business.
>
> If an owner's draw is taken, typically a cheque is written to the owner for
> the amount, and a transaction is recorded crediting chequing and debiting
> the owner's equity out account. The transaction would not be recorded until
> the cheque was written, so there would be no question of the books being
> out of sync with the reality of what is in the accounts.
>
> If an owner's draw is acknowledged but not immediately taken, a transaction
> is recorded crediting a liability (money owed to an individual) and
> debiting the owner's equity out account. When the cheque is written,
> another transaction is recorded crediting chequing and debiting the
> liability account.
>
> I don't know why the owner would not immediately take the cheque for the
> draw, but I can imagine that there might be reasons.
>
> In the olden days, books were closed to help with the calculations needed
> to determine various quantities including an appropriate amount for owner's
> draw. Nowadays with computers and a properly organized chart of accounts
> the necessary calculations can be done at any time without closing the
> books.
>
> I can't quite wrap my head around the appropriate way to manage owner's
> draw in the context of closing the books, but I think I should be glad I
> don't need to wrap my head around it. :-)
>
> --
> Edward Doolittle
> Associate Professor of Mathematics
> First Nations University of Canada
> 1 First Nations Way, Regina SK S4S 7K2
>
> « Toutes les fois que je donne une place vacante, je fais cent mécontents
> et un ingrat. »
> -- Louis XIV, dans Voltaire, Le Siècle de Louis XIV, Chap. XXVI
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