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mhcarey
February 20, 2022
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How to close out owner's draw and owner's investment for a sole proprietorship

  • February 20, 2022
  • 1 reply
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I have a sole proprietorship. I just closed my books for 2021 (I know it's February, I'm a little behind) and now I want to close out my owner's equity temporary accounts into retained earnings. I have two equity accounts: owner's draw and owner's investment. I know I close them out with a journal entry (or journal entries?) on the first day of the new year. I have seen several posts like this one about closing owner's equity accounts in QuickBooks, but the answers are too brief for me to understand. I'm brand new to accounting and really need each step spelled out for me explicitly. I also found this video, which is very helpful, but it only addresses owner's draw, so I'm not sure what to do about owner's investment.

 

Can anyone explain step-by-step how to close out both owner's draw and owner's investment at the end of the year? To make things more concrete, my owner's draw account is at -16,596.84 and owner's investment is 15,610.49. Thanks!

Best answer by Rustler

Owners equity does not close out to retained earnings, it is the other way around. Retained earnings closes to owner equity. retained earnings is last years net profit.

 

Assuming the balances in retained earnings,  investment, and drawing are positive numbers on the balance sheet

Journal entry
debit equity investment, and credit owner equity for the balance in investment
debit owner equity and credit owner draws for the balance in draws

debit retained earnings and credit owner equity for the balance in retained earnings

1 reply

Rustler
RustlerAnswer
February 21, 2022

Owners equity does not close out to retained earnings, it is the other way around. Retained earnings closes to owner equity. retained earnings is last years net profit.

 

Assuming the balances in retained earnings,  investment, and drawing are positive numbers on the balance sheet

Journal entry
debit equity investment, and credit owner equity for the balance in investment
debit owner equity and credit owner draws for the balance in draws

debit retained earnings and credit owner equity for the balance in retained earnings

    M
    mhcareyAuthor
    February 21, 2022

    Hi Rustler, thanks for the explanation, that's exactly what I needed.

     

    One follow-up question: I only have two equity accounts in my chart of accounts (owner's draws and owner's investments), but it sounds like I need a third account for owner's equity. Is that right? The owner's draws and owner's investments accounts are currently not sub-accounts (they came with QuickBooks this way; see this screenshot from my chart of accounts):

     

     

    Should I make a new parent account called "owner's equity" and change owner's draws and owner's investments into sub-accounts of owner's equity?

    Rustler
    Rustler
    February 22, 2022

    I suggest for sole proprietors and partnerships the owner/partner equity accounts look like this:

    [name] Equity (do not post to this account it is a summing account)

    >> Equity ( first of the year roll up drawing and investment into this account as well as retained earnings)

    >> Equity Drawing (record the value you take from the business here)

    >> Equity Investment (record the value you put into the business here)

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