In today's video I want to share with you how do you close out
your owner's equity and your contributions, shareholder, owner,
whatever type of equity you have,
how do you close it into your retained earnings
So every year you start from scratch
with how much you've contributed or taken out in distributions
in your company, or draws
So the first step is to understand how retained earnings work
it helps to understand this now I've done a video on it before
but I thought I would walk you through it again
So remember, there are two steps with when we're talking about
equity and how this works. So the first is to understand how
the profit and loss works
So you can go under reports company & financial
profit and loss standard
And then you're gonna go over here, and you're going to pick up the last year,
and you're going to see a number at the very bottom down here
This, in this example, it's 939.77. That is the profit for this company
If it was a negative, it would be a loss, right?
So the profit and loss is, what is your income minus your expenses
gives you your profitability
So then when we come over here
and we look at the balance sheet
we are going to see our retained earnings
or what it calls actually our net income 939.77
do you see that? It's the exact same amount
So at the end of the year
you have what's called net income
and on the first day of the next year
QuickBooks goes in and does a closing entry
behind the scenes that moves it from your income
over to your retained earnings So when we double click on this
and then we drop this down, and go to all you'll see it closes it
into the retained earnings
in this example
So then what we also want to do is we want to take our equity accounts,
the rest of our equity accounts, and also close those into retained earnings
to adjust them and that's what we're going to talk about now
Okay
So when we come in here
if we go to say the end of the year
let's adjust this as a sample file
to the end of 2025
We're starting now 2026, we come down here and we go to
our equity account, and we'll see Oh, there's owner draws,
yours could be shareholder it depends on your entity structure
but there's owner draws of $6,000
If we go to the first day of the next year, we also have our net income as a loss
And we go to the first day of the next year, you'll notice
retained earnings happens again
But the owner's draws just sit there
and unless you do a closing entry,
opening balance equity
distributions and contributions will just sit there
So how do we adjust for that?
Let's go back
to December 31st
and we'll see our detail. Now remember, if you ever want
to see exactly what's in there, you can double click on it
Now you're going to do this after
you've gone in, your tax professionals done your returns,
you've entered a new depreciation like you've done all your other things
and this is one of the other steps in closing your books
So you're gonna double click, and you can come in here, and you can go
to all you can kind of see, or you can do just last year,
but you should see exactly what's happened, okay
and this is a sample file so the 2025 year is the current year
So we'll see we have $6,000 in...
draws or distributions
and we're going to close those into the retained earnings, okay
so you need to know the dollar amount
that you want and then you're gonna go over here to company
make general journal entries
Now
we do our closing entry for the distributions
or if you want to also close out contributions on the first day of the new year
The reason we do that is because
equity is considered a temporary account
and we want to close those out
and we do it on the first day so that it doesn't impact the prior balance sheet
So it matches whatever you have done for it doesn't impact your
retained earnings so that we always matches
what you did on your tax return So your balance sheet doesn't change
It changes the next year
just like when we were pulling our...
balance sheet
and we noticed that the retained earnings transactions always
happen on the first day of the next year
It happens behind the scenes with QuickBooks
the same is going to happen so that way we aren't impacting
what our balance sheet says at the end of the year
we always will know exactly how much we took out in draws for that year
but we make the adjusting entry the next year
Okay, so we'll go in and make our journal entry
and we're going to use the first day of the next year
and you're going to come in here and you're going to put in
your
account
that you use. So if your account under your owner's equity is
draws, you would and you want to adjust that
you would select that first
okay
Then you're going to come in here and you're going to adjust it
So if it's negative
equity is considered a credit basis so if it's draws and its a negative number
you're gonna want to add
it as a credit to adjust it
then you're gonna come over here and you're gonna do retained earnings
it does not like you adjusting retained earnings
So what you're doing is you're basically
reducing your retained earnings by what you've taken out in
equity in your business, okay? Now, if you have owner contribution
I will add a line here, you would come in
and you would do owner's contribution
and owner's
contribution is typically going to be a positive number, so you would do that as
a debit to counteract that and between the two,
you do retained earnings for the difference so let's say that this was $1,000
in contribution right?
Let me, delete this
So then you're going to have the difference is going to be 5000, your debits and your
credits have to match then you put 5000 here
And between the debit and credit side, it would match. Now you only need to do a
contribution adjustment if that's actually what happened.
If you only had draws in yours and no contribution,
then you're only going to adjust it accordingly I just want to show you
in case you have that example, you know how to do it
and then you're gonna come over here and you're going to do closing
It's only because you're watching I'm having typos
Just kidding
closing owner's draws
for 2025
into, you can do whatever you want
as your
as your memo, but you want to put something so you know what you're doing right?
So you can go back and look at it later So you can just go closing entry
That's what a lot of tax professionals do where they do
nothing, no memos, but I'd like you to do something
and then you're gonna click Save and Close
It's going to give you a warning and you're going to click OK
and then you are going to come down now what you'll notice is it doesn't adjust
the current balance sheet, which is exactly what we want
but as soon as we go to the first day of the next year
and we click on it, you'll notice it totally disappears
and if we go over here to list
chart of accounts to see like what happened behind the scenes
and we scroll down to our equity accounts
So here's our draws, you'll notice that zero
we double click on that and you'll see all of the transactions that went in
and then the entry that we did to zero it out
and that way we can start a fresh year
tracking exactly what we did each year
Let me know if this helps you give me a thumbs up
SUBSCRIBE
and if you want to make sure you get these tips and tricks in your inbox
make sure to go up above or down below and subscribe to our tips and tricks
And if you're looking for more training on how to really customize QuickBooks
to your specific business, check out Confidence with QuickBooks
Thank you for being here and I look forward to seeing you
inside the next tip and trick
Have amazing day
Bye