I'm confused by one of my CPA's Adjustments last year:
Retained Earnings 3,305.51
Owner Funding To Corp 29,336.92
Distribution to Owner 32,642.53
Memo: Close prior year distributions and owner funding to retained earnings
I understand the closing out of Owner Funding to Corp, but can't figure out where the number for retained earnings is coming from.
It appears that you took distributions of $32 K which showed as a debit (negative) in the equity section of your balance sheet. Also you put $29 K into the company which showed as a credit (positive) in that section. Both of these accounts are period accounts, by which I mean that they reset each year to zero.
I assume that the money you put in the company was in effect a return of the monies you took out rather than a loan to the company which would have to be repaid. If it was a loan it would have been reclassified to a liability account. As it it the CPA made the implicit assumption that it was not a loan and so offset it against the distributions.
So the CPA's entry is to transfer the balances in both accounts to retained earnings. The entry goes to Retained Earnings since that is the account that is used to accumulate not only the earnings of the company but the net withdrawals of those earnings.
I feel sorry that you apparently did not feel comfortable discussing this with your CPA. I often get questions on adjustments I make on clients books.
I hope this resolved your question. If so please mark the question as solved or post a comment for additional questions.
Good luck,
MikeBJ CPA
At least I suppose my thinking was correct. The problem is that there was a balance left in the owner's distribution account. Is this a mistake?
The firm I was using, the first CPA had some problems and my books were then transferred to another CPA. The first CPA cleared the owner's distribution to retained earnings, but the new one did this. I asked for an explanation and didn't ever get a reply. A month or two later I fired them.
So for this year I should credit all of owners distrobution and credit all of owner funding to corp with retained earnings?
coopermikel,
I forgot to say before my unsaid assumption that you have an unincorporated entity, eg partnership, proprietorship. That now being said you pay tax on the income from the company whether you take it out or not. That means that the distributions are not taxable to you. By the same logic moneys you put into the company are not income to the company or deductions to you but just increase your basis.
Thus you are not taxed on the distributions whether you take out a part of the earnings of the company, all of the earnings or more than the earnings.
By the way the term Retained Earnings really applies to a corporation so if you are indeed unincorporated you can change the name of the account to something like Owners Capital, Partners' Equity etc.
Hope your questions are answered.
MikeBJ CPA
