Linda Artesani shows how to set up owner equity accounts in QuickBooks Online and record three key transactions: a $100 personal cash investment into the business, pre-startup expenses paid with personal funds, and owner withdrawals. She warns against classifying owner draws as expenses or income, which is a common mistake for sole proprietors.
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Hi there, Linda Artesani, Artesani Bookkeeping. So to continue with the videos on some of the trickier transactions in QuickBooks and some of the ones that I see people ask me about, or I see in files that are not completely right, I'm going to move on to a sole proprietorship type of company and when the owner puts money in or takes money out, how do you enter that transaction? So we're going to come over to my sample company. And first thing I do, I prefer to have the account set up, the equity account. You can have one owner's equity account. That's usually set up right here by clicking New and then selecting the type Equity. And then you'll see in here there's owner's equity and there's also paid-in capital surplus, partner contributions, partner distributions. Okay. Partner equity. That depends on the type of business you have, but if you're just a plain old sole proprietorship, your business ID number is your Social Security number, then I like to set up this— these accounts in this way. I'd like to create the one owner's equity, and that's the parent account, and then I like to do an owner's investments and an owner's withdrawal. Then when I produce the Balance sheet, at tax return time for the CPA, I just collapse those accounts so everything rolls up into the parent. But this way I can see what monies I've put in the business, what monies I've taken out of the business. For example, let's just say you're going to make a deposit and you're going to start your checkbook. So you found that you separated your checkbook, you opened up a bank account in a bank, you put $100 of your personal money into the bank to To start this checking account, and you want to show that, and it came out of your personal funds. Obviously, this business is you, your Social Security number, it's all the same thing, but you want to show this on your books. So we're going to come over here and make it a vendor for me. And actually, I'm going to create it as a vendor, add myself in. It's going to ask me to make a customer because I'm in a deposit window. You can make a deposit and a vendor. I'm going to just make myself a vendor here. I'm going to hit Save. Now I'm going to show my opening balance on my new bank account. So I'm going to say that I got my bank account at Chase. So Chase Bank Account, or let's put Chase Checking. So it's my brand new bank account. I'm going to hit Add and make that bank account on my books. And it's my bank account for my business, so Chase Checking. And I'm just going to hit Save and Close. Now, I'm going to show the opening amount. If I tried to create this in the Chart of Accounts, it's going to throw everything into Opening Balance Equity Account, which is not where you want it to go. I want it to show that it's coming from me into my new Chase account. So now that I've created my account, I'm going to put it up here because now it's my deposit. So I'm depositing it into the new Chase account. And then what I'm going to do here is create a transaction that goes into my owner's account. It's in my owner's equity, but it's an investment. I just opened this up and put $100 out of my pocket into this account to start the bank account. And I'll hit Save and Close. Now let's say I had a lot of startup costs. I want to show the startup costs that I've spent personal funds on, and I want this to be in the books. So I had to buy— let's just say I sell widgets. And I want to show all the stuff that I needed to buy to start my company. Maybe I had to buy a computer for my company. Maybe I had to buy products for my company to start to be able to sell these widgets. Maybe I had to buy postage. So those are the things. So how would I enter that into QuickBooks? I did this way before I really started this company and I want to show this on my books. It's, you know, maybe I did it 2 months ago and now I'm actually getting the business going. How do I show this? So you come over to the plus sign, make a journal entry. This is one of those rare occasions that a journal entry is warranted in the books. So let's just say I did all this on January 2nd. So I bought a— I bought some office supplies. So I'll put office expenses, $234.67. To show purchases prior to start of business. Wow, I can't type today. And then I purchased some widgets, so I have a supplies account, supplies and materials, and let's just say I spent, I don't know, $1,002.45. On my account for products that I needed, some stuff I needed to make for my products that I'm going to sell. I needed some postage, and let's just say I spent $49 on some postage. Um, trying to think what else I could purchase here. Um, just odds and ends. Maybe I had to contact a CPA, so I had some professional fees. So I had some professional fees. I wanted to talk to the CPA. How do I work with this? So maybe he charged me $250 to talk to me about how to work with this business, and maybe he said it was fine. You're just starting out. Maybe it's a part-time thing for me. So I want to show him that I— I want to show that I spent some money with him. And anytime you do that, you want to show that all of these things, these are all my expenses, so I want to show them as debits. Okay. So that's it. I spent $1,500 out of my own personal funds for this particular business. Now I want to show that I put this money into my business, right? This is money that came out of my pocket personally. I didn't get this as income, but I want to show these on my books that I had these expenses prior to my— really the opening of my business. So again, it's an owner's investment, right? I put this money into the business. I want to increase my owner's equity account. By showing this, so I'm going to just say save and close. Now let's just say my business is doing quite fabulously, and now I want to take money out of my business to pay myself back. I just done making money, and I'm doing really well, and I want to show that on my books. So I'm going to go to my Linda Artisani vendor name, and I'll take it out of my Chase account. Which only still has $100, but we'll put it there. And now I'm going to take— let's just say I'm going to take my $100 back. So I'm going to go to my Owner's Withdrawals account and take my $100 out. And I will print it later. So now you can see— and I'll put today's date— now you can see that I'm taking money out of my business. So now I'm withdrawing it. Save and Close. So how did that affect myself? far as my equity goes. So let's go to Reports, let's go to the Balance Sheet, we'll run it as of this year-to-date and look at it. So here's the money, monies that I put in. If we go into the Owner's Equity account here, you can see my investments are the $15,3612, which is the odds and ends that I put in that I paid for with my own, like, out of my own cash, not with income from the business, and then there's my $100 to start my bank account. If I were to show this report to my CPA at year-end, he doesn't need to know how much I put in, how much I took out, he just needs to see the equity, and he can see that in my, in my general ledger. So I just roll it up so I can see what my actual equity in the business is. What did I invest? So I did have $36,012, but I put in $100, I took $100 back because I had that as money that I could take out of the bank. Extra money, and I paid myself back for what I used to open my checkbook. So right now, the equity I have in my business is $1,536.12. So that's typical transactions that you'll see. A lot of times what I do see with people is they will go and put money— take money out of their business because maybe they needed money for whatever purpose, and they'll just write themselves a check out of it. And then they'll create an account in the chart of accounts called owner's pay. So a lot of times what I do see on people's books is I will see where somebody will write themselves a check, money out of their business, and they'll write it to— and they'll make an account called an expense account and they'll call it owner's pay. And they'll take it out of their business as an expense. Well, it's not really an expense. Unless you have payroll, that's when it becomes an expense. You've got wages. But if you're just a sole proprietor and you're taking money, putting money in and taking money out, it's never an expense on your books. So just know that as you go forward, you shouldn't see owner's pay listed in your expenses. Same thing for income. It's not owner's income when you put it in. You don't want to show it as income, and that's taxable. So you want to make sure that you put that into the equity account. So hopefully that explains for you how you put money into your business and take money out of your business if you're a sole proprietor, and you would set it up a little bit differently if you're a partner. You use the words partner, but it's the same, same method. Hopefully that's a little bit more detail that you'll need as you go forward. It's never an expense and it's never income when you put money, personal funds, in and out of your business. I hope that's helpful. If you have any questions, please feel free to reach out to me. Again, this is Linda Artesani, Artesani Bookkeeping. Thank you. Thank you for watching. Bye now.
