How do you treat owners drawings at the end of financial year? Should they be taken off the balance sheet or left there to accumulate. The business owner wants to see only the current year's drawings on the balance sheet but the tax accountant has advised that the cumulative owners drawings should be left on the balance sheet. What is the correct treatment?
Australia Owners drawings
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Are they distributions of equity?
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The components of a balance sheet are assets, liabilities, and equity. I'm not sure how distributions to owners could accumulate in any one of those categories. The JE would be a Dr. of the Equity account and a Cr. of the Asset account. Neither account is increased as a result, and thus would not reflect an accumulation per se.
Those accounts would, however, reflect a current balance since after all a balance sheet is a presentation of financial condition on the date of measurement. It is not a historical presentation like the income statement ie p&l or statement of cash flows.
Those accounts would, however, reflect a current balance since after all a balance sheet is a presentation of financial condition on the date of measurement. It is not a historical presentation like the income statement ie p&l or statement of cash flows.
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The owners drawings and funds introduced is appearing under current liabilities area of the balance sheet but it shows all transactions since 2018 when the business was started. The tax accountant might have done all the taxes correctly but does not want to help clearing it out on the software side. I do the office admin for this small business and they have an external tax accountant, hope that makes sense.
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It would not be incorrect for the payables account to show the transaction history. But it shouldn't show an accumulated balance if payments have been made. It should be debited as cash is credited, reducing each.
The question is what account is being debited when the payables account is increased ie credited. If the distribution was being treated as income, then an expense account would be debited to reflect in the p&l. But owner distributions generally are not reflected in the p&l.
If the payables account isn't being debited to reflect the distribution, then the balance sheet will be out of balance. The tax accountant would not be concerned with this, but the bookkeeper or whoever manages the books should be reconciling accounts periodically. At which point the imbalance would be noticeable.
So, the next step would be to prepare a trial balance. Debits should equal credits.
The question is what account is being debited when the payables account is increased ie credited. If the distribution was being treated as income, then an expense account would be debited to reflect in the p&l. But owner distributions generally are not reflected in the p&l.
If the payables account isn't being debited to reflect the distribution, then the balance sheet will be out of balance. The tax accountant would not be concerned with this, but the bookkeeper or whoever manages the books should be reconciling accounts periodically. At which point the imbalance would be noticeable.
So, the next step would be to prepare a trial balance. Debits should equal credits.
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Thanks. The business owner was doing the accounts himself until now. I have recently taken over, so no one has done any reconciliations from 2018. I have fixed payroll and other errors but this one seems quite confusing to me.
The current situation is that it is Dr Drawings and Cr Cash. The drawings is taken from business profit. Xero help threads seem to be saying that there should be an equity account and drawings and funds introduced should be put in it at the end of year but I cannot see any equity account in this business' accounts. There is only "Owner Share Capital A" account in equity. Does a new owner equity account need to be created?
The current situation is that it is Dr Drawings and Cr Cash. The drawings is taken from business profit. Xero help threads seem to be saying that there should be an equity account and drawings and funds introduced should be put in it at the end of year but I cannot see any equity account in this business' accounts. There is only "Owner Share Capital A" account in equity. Does a new owner equity account need to be created?
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"Owner Share Capital A" is not an inappropriate title for an equity account.