USA Owner contributions & distributions

[Doni49]

I'm trying to set up my books for a small rental property business -- so far only one property but looking to add more this year. I don't have an RE license so I will NOT be managing for others.

When I move money from my personal checking account into the business checking account (intending to make a contribution) that would be a Deposit ("Credit") to the checking account -- correct? Likewise, when I go the other direction, that would be a Withdrawal ("Debit") -- correct? I ask that because when I was researching the next question, I was seeing things that seemed to imply the opposite. That just doesn't make sense to me.

Anyway, the second question (the one I was researching when the first question came up):

How should the contributions and distributions be listed in the books?

My first inclination is to think that when I provide a contribution to the business, that is now an ASSET of the business (the business OWNS that which was contributed). When looking at double entry bookkeeping, one side of the transaction would be a DEPOSIT (Credit) to the Business Checking account and the other side of that transaction should be a debit. But how can it be a debit from the contributions account?

It's not a liability because this wasn't a LOAN from me to the business. But if it were a Liabilty, that would work. I'd debit the Liabilty account and credit the checking account.

Then there is the question of making Distributions. If I make a distrubution and it's reflected in a separate Distributions account, that account will get deeper in the negative while the Contributions account always grows.

So then i started thinking maybe I need a Contributions and Distributions account which would show BOTH. But again I go back to the beginning of this second question -- is this going to be an Asset account? How can I CREDIT this account AND crdit the checking account?

 

[Doni49]

P.S. I'm currently looking for an accountant and will ultimately follow their advice once I find one. There are accountants in my area but none of the the ones I've talked with have much experience with real estate investors. I've also talked to a few who actually do work with RE Investors -- but only those with a large portfolio.

But until I find one, I do still need to keep track of the books and want to do it as well as I can.

 

[Doni49]

I think i found part of the answer.

Based on my reading of the following link, I am giing to refer to it as my CAPITAL ACCOUNT to which I make deposits and withdrawals. But I'm still confused as to how the transaction will be a Deposit for both the Capital account AND the checking account.

How a Does a Business Owner's Capital Account Work?

A business owner's capital account is their share in the business. Learn what types of owners have capital accounts, and how these accounts are set, changed, and taxed.

www.thebalancesmb.com

 

[Drmdcpa]

A deposit into the business account on the business' books is a debit to cash and a credit to an equity account or a loan/liability account.

The reason many think it should be a credit to the checking account is because most people understand how banks view things. When you deposit into your bank account, the bank refers to it as a credit because it is a liability to the bank. When you use your debit card to make a purchase or withdraw cash, in the bank's eyes, you are lowering their liability.

But for the customer of the bank, things are reversed. Thus increases in bank balances on the customer's bookkeeping records are recorded as debits or increases in assets.

If your local "accountants" do not understand something so basic, you should use quotation marks when referring to them as accountants.

 

[Doni49]

So you're telling me that when I give money to the bank for them to deposit into the checking account, I need to enter it into my books as a DEBIT? That seems completely backwards.

No I haven't asked a local accountant about this particular issue. When looking for an accountant, I asked about their experience. None of the ones I've talked with have worked with RE Investors. The few accountants I did find who have experience with RE Investor declined to work with me because my business is "too small".

I recently started working on setting up gnuCash to handle my books and haven't spoken with an accountant since starting this process. This one issue is my only remaining stumbling block.

 

[Drmdcpa]

I am not sure why you think it is odd to debit a checking account when you deposit money. Your bank accounts are asset accounts. Assets are increased by debits and decreased by credits.

I am surmising there are other reasons accountants would not take you on as a client.

I can count on one hand the peers I have known over 25+ years that could not handle RE.

 

[Doni49]

Ok I went back to gnucash and see that it has deposits on the left where Debits go and withdrawals on the right where credits go.

It still seems counter-intuitive to think that a deposit into the account is considered a decrease and said deposit causes the account balance to INCREASE. But I'll work with it.

 

[Drmdcpa]

Hahahahaha. You reminded me of an issue I had with a college instructor. He claimed debits were only on the left by convention; if you put debits on the right and credits on the left, you should still get useable information which is the end result of accounting.

So I did just that. I turned in an assignment with all debits on the right and credits on the left. End result was the same numbers but in the negative.

He gave me an F for that assignment. Hahahahaha.