Subtitles of the Movie

In this movie, we'd like to talk about closing out Equity Accounts at the end of the year. Please keep in mind that the entries that I'm about to show you were intended to show the procedures for closing the accounts. There are many different strategies that are used for Equity Accounts. Please check with your accountant and discuss it with the owner of the firm before determining which way is best for you. Let's start by going to our Balance Sheet and going down to our Equity Accounts. For this example I'd like to actually concentrate on just an individual partner. Let's use Partner Two. In Partner Two we have an investment of 50 dollars and a draw of 35 dollars. I'm starting a new year, so I'd like to zero these out. The idea is that for the new year, I'd like to see the investment and the draw as year-to-date only. In this regard, we'll go ahead and create a journal entry. In our first journal entry, we will go to Partner Two. I'll type P for Partner. It gets me down there a little easier and choose the Investment Account. When I go to the Investment Account, I need to just debit the account for the exact amount on the Balance Sheet. Now, I can't see the Balance Sheet from here, so I'm just going to restore my screen to a smaller size. Notice in the background it allows me now to clearly see my investment. When I'm working with Balance Sheet Items and doing journal entries, I find it very helpful to see the actual information in the background. I'm going to debit the Investment Account for 50 dollars in order to clear it. Then I'll go down to the Draw Account, once again typing in a P for Partner and go to Partner Two Draw. To zero the Draw Account, I'm going to use an actual credit since it's a negative number in a liability area. Finally, the Offset Account that I'll use to track accumulated equity for this partner is going to be the Partner's Equity Account. I will now select it. I'm happy with my entry. I will Save and Close. Let's go back to a full screen on our Balance Sheet and you will notice now that Partner Two no longer reflects investment in draw. It's contained in one account. As the new year goes on, I will accumulate investments and accumulate draw. Another item that will take place at the end of the year is the close of the Net Income Account. Note: on December 15 that there is approximately 110,000 dollars worth of net income. Let's switch our date to January 1 and when I do, you will note that the Net Income Account disappeared. What we will want to do is to split our retained earnings so that each partner has their share reflected in the Equity Account. To do so, I'll do another journal entry. Once again, I'm going to return to a journal entry. Now, for the simplicity of the transaction, I'm going to pretend that Partner Two owns 70 percent of this total, or actually let's just say approximately 70,000 dollars. I'll go to the journal entry and once again I'll choose my Partner Two for the Equity Account. I'll choose my equity. I'm going to increase it by 70,000 dollars. In the accounting equation, any liability or equity is increased through a credit balance. I'm going to decrease my Retained Earnings Account. So I've selected Retained Earnings in the Account Section and once again, 70,000 dollars. Now, traditionally, I'll record this entry at the end of the year; Save and Close. You'll notice that it warns me that I'm changing a Retained Earnings Account. This is an audit trail warning. Retained Earnings must always match your tax return at the end of the year, so always be cautious and make sure that the accountant filing your taxes is in agreement with the techniques that you are using. Let's say OK and go back to our statement. You'll notice now in the Balance Sheet that Partner One has their equity recorded individually. The second half of Retained Earnings would now be tied into Partner Two's equity. These entries at the end of the year are again for the ability to be able to look at the Investment and the Draw Account on a yearly basis. At the end of the year we roll them into one Accumulated Equity Account. In the case of one owner, there's no need to have a second Retained Earnings Account since this reflects all of my earnings from the time of the inception of the business. However, in the case where there are partners, it is traditional to split that amount apart into the Individual Equity Accounts so that the owners and partners know exactly where they stand at any given time.