Question on LLC member distributions w/o closing books

[Buddha Buck]

On Mon Feb 23 2015 at 10:12:25 AM Matt Kowske <jmk at cmail.nu> wrote:

> Ok, so I seem to have come to an understanding by writing that out. The
> balance sheet, over time, will have a larger and larger negative balance
> for Distributed Earnings and a larger and larger positive balance for
> Retained Earnings (calculated, assuming a positive profit is generated).
> This seems a little weird to me but it is correct accounting, yes? The
> total equity should remain close to the original amount of equity each
> member put in if payouts are made consistently and for all profits.
> Retained profits will be represented by the "Retained Earnings" on the
> balance sheet. The "Retained Earnings" account I have in my CoA should
> just be removed, as this is auto-calculated on the balance sheet. For
> some reason this approach seems a little "messy" but maybe that's just
> how it's done... I'm new with this.
>

"How it's done" depends a bit on who you talk to. Traditionally, with the
closing of the books, "Retained Earnings" is an equity account that gets
replenished every time the income and expense books are closed, and no one
ever made profit/loss reports across closed books without carefully keeping
track of those closing transactions. The advantage was that distributions
could come from a real account; the disadvantage was that reporting for
arbitrary dates could be hard.

With the "don't close the books" philosophy, it's easy to get reports
covering any dates, but it also means that the balances in the income and
expense accounts are all-time totals, not this-period totals. But it's easy
to get total incomes/expenses for any period, not just pre-defined periods.
Unfortunately, it also means there's no real account to use for
distributions.

Which method you use depends both on your needs and your accounting
philosophy. With accounts done by hand, there are a lot of advantages in
the periodic closing of the books -- you don't have to look past the most
recent closing date to compute the balance,  or the older physical books
could be archived offsite -- but those are not critical for computerized
accounting.

Correct me if I'm wrong, but a balance sheet shows a business financial
> position up to the current point in time.


Close: the balance sheet shows the financial position *at* a particular
point in time. It doesn't have to be the current point, and I think the "up
to time T" description suggests it covers a time period, not an instance.


> The difference in using the
> approach outlined above, and the old school closing of the books, would
> be that the balance sheet would show the amount of retained earnings
> over the entire course of time of the business if you do not close the
> books vs. retained earnings for the year (or whatever period the books
> were 'open'). Is that right?
>

Sort of.

If no distributions are ever made, and the balance sheet is prepared right
after the books are (or would be) closed, then the two balance sheets would
be identical. With books closed, the actual Equity:Retained Earnings
account would contain the total sum of income less expenses over the course
of the life of the business.  With books not closed, the synthetic Retained
Earnings line would contain the total sum of income less expenses over the
course of the life of the business.

If you also regularly distribute the entirety of Equity:Retained Earnings
to the various owner's equity accounts, then that account would only hold
the retained earnings since the last such distribution. This may, or may
not, have anything to do with the period the books are open. You may decide
to close the books monthly, and distribute equity quarterly or annually,
for instance.