journal entry question

It might not be "by the books" all the way through, but you can set up a regular current liability account (Draws to Pay). You will need to do a journal entry to credit the Draws to Pay and debit the Member Draws. When you actually pay it, put the Draws to Pay account on the check.

Reka

Reka: Just because you make something up, doesn't make it correct. I would love to see an IRS or GAAP regulation sited on this.

And why would you want to post draws to the books that are not being paid out? Or why would you want to artificially lower the basis of the partners? This is where understanding the tax return comes in handy. Because the entry is unnecessary and doesn't make sense from a business or tax standpoint.

Marc

There is no GAAP or IRS rule that makes this transaction correct. It does not make sense to keep the payable on the books for long. It absolutely does not make sense to keep the payable on the books at the end of the year.

If the entity is a corporation, the board of directors should declare the dividends. At that point the dividend is a liability for the corporation. It should be put on the books. So there is still a little sense behind it. The question mentioned "members" and not "shareholders". The entity still could be a corporation for tax purposes. In that case this whole accruing the dividend/distribution liability might even make sense.

We can see so many transactions recorded incorrectly, out of GAAP, out of IRC. If the transaction has a good description the tax professional should be able to deal with it and reclass it at the end of the year. We cannot and probably should not expect small-business owners to know GAAP and/or IRC and to record everything by the book. I think it is much more important to keep their books in a way that makes running the business easier for them and does not make the tax professional's job very difficult.

Reka