Question on LLC member distributions w/o closing books

[Edward Doolittle]

If I'm not mistaken, Wm proposed your option II), calling the account
Equity:Member A:Out .

On 22 February 2015 at 13:09, Buddha Buck <blaisepascal at gmail.com> wrote:

> 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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>


-- 
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