Question on LLC member distributions w/o closing books

[Edward Doolittle]

OK, let me check in again.

1) The benefit of closing the books is that some important number(s) (e.g.,
Retained Earnings) are reflected in the chart of accounts, from which an
appropriate owner's draw can be calculated for the period between two
book-closings. The drawback, on the other hand, are that we are stuck
without that useful information (and other useful information) except for
certain moments in time (e.g., December 31 of each year).

2) If we don't close the books, we can access some useful information any
time, but the drawback is we don't have a nice number sitting at some
location in our chart of accounts which represents an appropriate amount
for owner's draw.

It seems to me that the drawbacks in both cases can be mitigated. In the
first case, we can make periodic estimates of what is likely to happen
(based on the information we currently have and future predictions from
budget, say) on December 31. In the second case, we can mitigate the issue
by calculating the appropriate amount using the correct *report* instead of
just the summary information embedded in our chart of accounts. Whether the
necessary report comes supplied with GnuCash, I don't know.

It seems to me that the second way is far more flexible and natural, and
that the first way is a holdover from pen and paper days, but I understand
there can be a difference of opinion about such things.

I appreciate the point that Mike Novack has made in other threads, namely
that the particulars of good and legal accounting practice depend on the
context (type of business, jurisdiction). So our choices are circumscribed
by such considerations, and learning the requirements and proper practice
within our domain is the first order of business.

However, if there were a choice available to me, I would prefer the second
option (not closing the books), *provided* the necessary reports were
easily available or easily constructed. To me, periodic book closings make
certain times special, whereas in nature or in physics no time is special,
any moment in time is equivalent to any other (time translation symmetry).
I would rather reflect that natural principle in my bookkeeping if I could.

I also think that current accepted practice, and even legal requirements,
are not a reason to avoid innovation. Practice changes and even laws
change; we have self-driving cars now in some jurisdictions, so why not
accounting without closing the books? When businesses come to realize the
flexibility that paradigm can provide, I think they will try to make it
accepted practice if it isn't already.

In the end, I think that whatever one can do one way (with periodic
book-closings) one can do the other (with no closings, but with nice
reports which are recalculated whenever one wants). I could probably even
figure out a mathematical mapping between one type of bookkeeping and the
other, although the mapping would be complicated. The difference between
the two methods is not about what is possible in one paradigm or the other,
but rather about what is easier, or more understandable.

Anyway, I think we may have beaten this thread to death. I hope I have
provided accurate (if perhaps somewhat biased) summaries.

E


On 23 February 2015 at 10:35, Buddha Buck <blaisepascal at gmail.com> wrote:

>
>
> On Mon Feb 23 2015 at 11:29:20 AM Matt Kowske <jmk at cmail.nu> wrote:
>
>> Ok, so the difference then (assuming regular distributions ARE made), is
>> that with closing the books and managing the Retained Earnings account
>> is that "Retained Earnings" would truly represent the amount of earnings
>> retained. The distributions are NOT retained, they are distributed and
>> this is reflected accurately.
>>
>
> Yes.
>
>
>> If you go the route of never closing the books, this Retained Equity
>> line on the balance sheet will not ever reflect the distributions made
>> and so will not be what has been retained in the literal sense of the
>> word.
>>
>
> Yes.
>
>
>> Also, if you do have your own Retained Earnings account and close the
>> books regularly -- does the Balance Sheet show both of these? The one in
>> your CoA and the one that is calculated automatically? Seems like that
>> could be a problem.
>>
>
> I haven't tried, but I would suspect that if the books are just closed, so
> the synthetic Retained Earnings is zero, then it might not show it,
> especially if you have the "don't show zero-balance accounts" report option
> set.
>



-- 
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