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Owner's Draws in a Partnership. Which figure shows what can be withdrawn?

Forum|Forum|7 years ago
December 11, 2018
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I have a partnership, myself and another are the two partners. We posted a loss the first 2 years in business, but now on the 3rd full year, we are currently posting positive net income. I am the only one who has added cash to the business each year for start up funds, so my equity account is different than my partner's. We have a 50/50 split of profits.

We are finally to the point where we can draw money to pay ourselves. I know that each of our equity accounts need to show a positive number and need to be available before each of us can take a withdrawal. Am I supposed to be looking at just this fiscal year's owner's equity account balances to determine the availability of funds? Or am I supposed to also be looking at the rolling balance total including the first 2 years of business also?

If I include the first 2 years as a combined total with this year, only my equity account is a positive number, my partner's is negative.

Thank you in advance for any help, I am a little rusty on equity accounts still.

QuickBooks Desktop

Best answer by Rustler

I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)

owner/partner equity
owner/partner equity drawing - you record value you take from the business here
owner/partner equity investment - record value you put into the business here

at the start of the new year, you roll up drawing and investment to the main equity account using journal entries. that way the drawing and investment account show only that years activity

debit investment, and credit equity
debit equity, and credit drawing

then you roll up retained earnings (RE), again with a journal entry

for a profit
debit RE, and credit equity (50% for each partner)

for a loss
debit equity (50% for each partner), and credit RE

So during the year you look at overall equity.

if you make the equity accounts from drawing and investment sub account of equity it makes it easier too

Technically, equity should never go negative, some allow it, some require an investment to bring it back to zero.

RustlerAnswer

I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)

owner/partner equity
owner/partner equity drawing - you record value you take from the business here
owner/partner equity investment - record value you put into the business here

at the start of the new year, you roll up drawing and investment to the main equity account using journal entries. that way the drawing and investment account show only that years activity

debit investment, and credit equity
debit equity, and credit drawing

then you roll up retained earnings (RE), again with a journal entry

for a profit
debit RE, and credit equity (50% for each partner)

for a loss
debit equity (50% for each partner), and credit RE

So during the year you look at overall equity.

if you make the equity accounts from drawing and investment sub account of equity it makes it easier too

Technically, equity should never go negative, some allow it, some require an investment to bring it back to zero.

A

arkvalleyinfoAuthor

Thank you for your help. We currently have a main Owner's Equity account set up for each partner, along with an owner's contribution and owner's Draw sub account under each.

However, one thing I have not been doing, is rolling up investment and draws to each main Owner's Equity account, and have not been rolling up RE either. I'm guessing I can still do this by backdating the entries for 1/1/14 and 1/1/15? Guessing I just need to also ensure they match up with the K-1's from each tax year?

And when you use the journal entry to roll up RE, I am either debiting or crediting the main Owner's Equity account for each, right? So then the sub accounts for draws and contributions should only show the current year's activity, and each main one will show the combined activity/balance from the start of the business?

And, after I would update these entries, I would then be looking at each main Owner's Equity account to see what is available to draw from?

Thank you and I apologize if my questions are redundant, as I am an amateur at this.

qbteachmt

"I know that each of our equity accounts need to show a positive number and need to be available before each of us can take a withdrawal."

That is not quite correct. Running your Balance Sheet might show you that net Income is positive, which means the Current Cycle has positive Equity; it just isn't posted to Equity, yet. You can decide if the business can survive without some funds in the bank, based on current Performance.

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