Transfer between personal & business accounting question

[Wm...]

Thu, 26 Nov 2015 20:02:36 <5657B9BC.1040506 at cmail.nu>
Matt Kowske <jmk at cmail.nu> wrote...

>On 11/26/2015 07:44 PM, Matt Kowske wrote:
>> On 11/26/2015 06:21 PM, John Ralls wrote:
>>>> On Nov 26, 2015, at 8:30 AM, Matt Kowske <jmk at cmail.nu
>>>> <mailto:jmk at cmail.nu>> wrote:
>>>>
>>>> On 11/26/2015 09:44 AM, John Ralls wrote:
>>>>>> On Nov 26, 2015, at 6:01 AM, Matt Kowske <jmk at cmail.nu> wrote:
>>>>>>
>>>>> This is a general accounting question on how to properly enter a
>>>>> transaction like this.
>>>>>
>>>>> I have two gnucash files I maintain. One for personal and one for 
an
>>>>> LLC. The LLC is at a point where it needs more funds to purchase a
>>>>> property, so owners are transferring some of their personal money 
into
>>>>> the business account to make a down payment with.
>>>>>
>>>>> On the business side I will enter this as Equity:Member 
A:Contributions,
>>>>> right? Or should this be a liability? On the personal side how 
should I
>>>>> account for this? Let's say I'm putting 5,000 of my personal money 
into
>>>>> the business. In my personal GnuCash file would this be 
Asset:Business
>>>>> Equity or Equity:Business?
>>>> I’m neither an accountant nor a lawyer, so treat the following 
accordingly and consider getting professional advice:
>>>>
>>>> How you account for it depends on how the partners decided to raise 
the money. If they voted to increase their capital ownership of the 
partnership then record it as equity. If they decided that it’s loans 
then record it as a liability. In the former case there should be a 
resolution in the corporation’s minutes; in the latter, a loan 
contract between each partner and the manager/managing partner stating 
the terms of the loan: Amount, interest, term, repayment, etc.
>>>>
>>>> The usual name for the equity account for capitalization is 
“paid-in capital” rather than “contributions”. I’d do it as 
Equity:Paid-in Capital:PartnerX rather than Equity:PartnerX:Paid-in 
Capital.
>>>>
>>>> Changing the paid-in capital has the possible ramification of 
altering the ownership portions of each partner if the ratios of the 
transfers are different from the previous ownership ratios. That should 
be spelled out in the resolution. Loans have no such constraint.
>>>>
>>>> In your personal books your money either adds to Assets:OurLLC or 
Assets:Loans:OurLLC depending upon whether the LLC treats the money as 
an increase in partners’ equity or as a loan.
>>>>
>>>> Regards,
>>>> John Ralls
>>>>
>>> Thanks this is really helpful in my understanding. I will treat them
>>> as loans for now. One question on the different equity accounts.
>>> Right now I have:
>>>
>>> LLC Equity:Member A:Member A Contributions = $0
>>> LLC Equity:Member A:Member A Distributions = $0
>>> LLC Equity:Member A:Member A Equity = $5,000
>>>
>>> LLC Equity:Member A:Member B Contributions = $0
>>> LLC Equity:Member A:Member B Distributions = $0
>>> LLC Equity:Member A:Member B Equity = $5,000
>>>
>>> This is from when the LLC was setup as 50/50 ownership, 5000 for 
each
>>> member as initial equity. If we were to contribute an additional 
2500
>>> each to increase the member equity, retaining the same 50/50 ratio
>>> then, you are saying it should go into an account called "Member
>>> A:Paid-in Capital" (or "Paid in Capital:Member A") or would I just
>>> rename the "Member A Equity" account to be "Member A Paid-In 
Capital"?
>>>
>>> Said another way, is the equity account I have already equivalent to
>>> your "paid-in capital" suggestion or would that be separated, like
>>> "Contributions"?
>>>
>> Assuming that you each kicked in $5000 to start the company, the
>> Member X Equity account is equivalent to paid-in capital. You can 
call
>> it whatever you want, they’re your books.
>>
>> I don’t know what a contribution in equity would be if not also
>> equivalent to paid-in capital. If distributions has the usual meaning
>> it’s generally a reduction in partner’s equity and unless you’re
>> winding up the company comes from retained earnings — for which you
>> should have an account.
>>
>> Regards,
>> John Ralls
>>
>>
> This brings up another question I am a little confused about. I don't
> have a "retained earnings" account as what I have understood from the
> GnuCash docs (http://wiki.gnucash.org/wiki/Closing_Books) that closing
> the books and having a retained earnings account is not needed, since
> that value is automatically calculated on the balance sheet.
>
> Given that this is the first year of business I would like to make 
sure
> I handle this correctly as the year comes to an end so any feedback is
> appreciated, thanks.
I would still be interested in your method, but I dug up an old thread
(from myself!) in which we discussed this at length, so feel free to
disregard..

https://lists.gnucash.org/pipermail/gnucash-user/2015-February/058701.htm
l


Thanks for the reminder.

It works like this: we can tell you what the ways to do stuff are but we 
are *not* *ever* going to give you actual accounting advice specific to 
your jurisdiction.  The world's tax and rule stuff is just too weird and 
location specific for anyone to know it all.  GnuCash gives you good 
tools (double entry accounting that works), how you wield them is, 
ultimately, up to you.

You've been given a number of ways of dealing with this in the previous 
thread and this one.  No person in their right mind will say 
unconditionally "do it this way" or "do it that way" unless you pay 
them.

GnuCash has a donation facility and awaits your payment ... but I still 
don't think that'll buy you advice.

Anyway, there is a really simple way to sort this out.

How much has each person put in and when?
How much has each person taken out and when?

Those are, I think, your main equity events and you should be able to 
sort them out with the other person over a liquid of some sort.

I'm in London, UK and I choose tea, milk, without.

MattK, equity in a small or start up business can be difficult.  We can 
tell you how to account for stuff but not how to value, for example, how 
much time one person has put in versus another.

Best wishes.

-- 
Wm...