Shareholder transactions and related transactions of small business owners between the owner and the business are very common in the daily activities of all small businesses. This article will briefly explain these types of shareholder / business owner transactions and show you how to set up the chart of accounts for QuickBooks Online. The general classification and logic will be similar for QuickBooks Pro, Premier, or almost any other accounting software program.
Capital investment
When the corporation or partnership is formed, the owner or owners invest money or assets in the business. This account is set up as a type of capital, generally as ordinary shares, in the chart of accounts. In exchange for their investment, shareholders receive shares in the company or in a company, their investment is effectively a capital contribution. Once the company receives cash for the issuance of common shares (or preferred shares), you would record the par value of the shares (number of shares issued multiplied by the par value) and record the excess of par value over the amount received by your business as additional paid-in capital in the equity section. Generally, capital accounts are not reduced unless shareholders sell their shares to the company. Preferred stock issues are complex financial instruments and are outside the scope of this analysis.
Shareholder advances
Shareholders, owners, or partners often borrow funds from their businesses on a temporary basis in the form of “temporary” advances due to personal cash flow needs, with the expectation of short-term payback. Sometimes, to pay for personal expenses from business profits, the owner sets aside a certain amount “owner’s withdrawal” and pays himself the monthly or weekly withdrawal. Short-term loans and advances are recorded as current assets in the chart of accounts, when there is a cash out.
Giveaways
A sweepstakes is often the payment of wages or commissions before they have been won. When won, the raffle is reimbursed, often converted to salary or commission expense. To record an owner’s retirement, set it up in the chart of accounts as a current asset account with the owner’s name or initials. The advantage of keeping owner withdrawals in a separate account is that it makes it easy to see a lot of money that you or your partners or co-shareholders have taken out of your business. Generally, the owner’s retirement account will increase.
Business loans
When the business has short-term cash flow problems and needs to pay its expenses with the owners’ money, the owner often transfers the necessary amount to the business as an “owner’s investment” or, if temporary, the owner. make a short-term payment. Advance. The short-term advance is configured as a current liability when it exists a cash inflow(in contrast to the cash outflow as described above for shareholder advances) from the business owner.
If a shareholder lends cash to their business and the advance is not temporary or they are not awarded additional shares in the business in exchange for the cash, then the business owes the shareholder the amount borrowed. This is recorded as a shareholder or shareholder or partner loan. To record a loan, set up a liability account (if there are multiple shareholders, you can set up one for each of them) with the shareholder’s name or initials, and within QuickBooks the account type is called “Other Current Liability” . This illustration assumes a loan that is expected to be repaid in less than 12 months. Otherwise, the loan would be called a long-term loan and would not be set up as a current liability. It would be constituted as a long-term loan.
Dividends
Dividends are a method by which profits are distributed to your shareholders (owners). Dividends are set up as an account of the type of capital called “Dividends”. If dividends are declared at the same time, but are paid after they are declared, you must first set up a dividend payable account “Dividends Payable” in the chart of accounts, as a current liability. When you pay the dividend, you reduce the liability account.
Share subscriptions
A shareholder can agree to buy a specific number of shares and pay for the shares at a future date. Such agreements are called share subscriptions and are normally recorded by debiting the subscriptions receivable and crediting the subscribed shares or the common (or preferred) shares issued and the additional paid-in capital in the capital section. The type of account in QuickBooks is equity. Share subscriptions can be formal or informal, and shares can be issued prior to receipt of proceeds from the share issue. And remember, this amount is an account receivable, which is owed to the company and is recorded as such, in the capital accounts. You can see that the amount is negative, and that is correct because it is an asset, the share subscription, therefore it shows as a counter account in the equity section of the balance sheet.
This article is intended to inform you of certain topics in QuickBooks Online that may be of interest to you while maintaining your QuickBooks Online. However, there is no guarantee that the information is complete in your coverage or adequate to address your particular situation. Accordingly, the information provided should not be relied upon as a substitute for independent analysis and research. Accounting, tax, legal or other professional advice is not being provided to public or private entities, nor is there any responsibility for updating the information. There is no guarantee that the material in this article is accurate or completely error-free. You should take steps to verify these statements before relying on them.