Learn the different ways that an owner’s money can be put into and taken out of the business.

Sole Proprietorship/Sole Trader Businesses

A sole proprietorship is an unincorporated business owned by one person. Generally, the proprietorship files taxes as part of the owner’s personal taxes, meaning that business profits count as income for the owner.

It is best practice to keep business money separated from personal money, so accordingly, most owner’s have a business bank account and a personal bank account. When a business first starts out it needs some money in its business bank account, so a common scenario is that an owner will put their personal money into the business bank account. This is called an “owner investment” (and in Kashoo, there is an account called “contributed capital” that can be used to track these funds”). So, whenever personal funds are put into the business, whether as a deposit into the business bank account or to pay for a business expense, the money would come from the “contributed capital” account.

Of course, the owner will also need to take money out of the business. When the owner does this, it is called an “owner’s draw”. You would use this account when you transfer money out of the business bank account to a personal bank account or to pay for a personal expense.

We’ll now go through some examples of owner investment and owner’s draw transactions.

Example: Recording an Owner Investment

If you have not modified the default chart of accounts, you will have an account called “Contributed Capital”.

Note: If you did modify your chart of accounts, make sure you do have an Equity account that you can designate as an owner investments account.

To record an owner investment of $100,000 on January 1, 2014:

  1. Go to the Journal Entries page and Enter Transfer:
  2. Date: January 1, 2014
  3. Amount: 100,000
  4. Withdraw From: Contributed Capital
  5. Deposit Into: Bank Account (this is your business bank account
  6. Click on Add Transfer

Setup an Owner’s Draw Account

To take money out of the business, you as an owner will want to set up an Owner’s Draw account.

To setup an Owner’s Draw account:

  1. Go to “Accounts” page and in the top section, enter:
  2. Name: Owner’s Draw
  3. Type: Equity
  4. Then click on Add Account

Example: Recording an Owner’s Draw

To record an owner’s draw of $1,000 on January 31, 2014:

  1. Go to the Journal Entries page and Enter Transfer:
  2. Date: January 31, 2014
  3. Amount: 1000
  4. Withdraw From: Bank Account (this is your business bank account)
  5. Deposit Into: Owner’s Draw
  6. Click on Add Transfer

Example: Recording expenses personally paid by the owner

In sole proprietorship, it may happen that an owner uses personal funds to pay for a business expense. How do you deal with this? You use the Contributed Capital account for the Paid From Account when using the Expenses page.

Here’s an example of an owner using personal funds to pay for a $50 office expense from Staples Business Depot on January 10th, 2014.

  1. Go to Income and Expenses page and Enter Expense:
  2. Supplier: Staples Business Depot
  3. Paid From: Contributed Capital
  4. Date: January 10, 2014
  5. Category: Office Expense
  6. Price: 50
  7. Click on Add Expense

The only thing different about this than how you would regularly enter a business expense is that instead of using your business bank account or credit card to pay for an expense, you’re using your Contributed Capital account.

Partnerships

A partnership is essentially the same as a sole proprietorship, except that there’s more than one owner. This means you’ll want to create an individual Owner’s Draw and Contributed Capital (Owner Investment) account for each owner.

For example, if there were two partners (Felix and Dan) in a partnership, the business could have the following accounts:

  1. Owner’s Draw - Felix
  2. Owner’s Draw - Dan
  3. Contributed Capital - Felix
  4. Contributed Capital - Dan

You’d follow the same account setup steps found above in the Sole Proprietorship example to create these Equity accounts.

Example: Investment of $100,000 by each partner

Here’s an example of both Felix and Dan investing $100,000 into the business on January 1st, 2014.

  1. Go to the Journal Entries page and Enter Transfer:
  2. Date: January 1, 2014
  3. Amount: 100,000
  4. Withdraw From: Contributed Capital - Felix
  5. Deposit Into: Bank Account (this is your business bank account)
  6. Click on  Add Transfer

That transaction will record Felix’s investment. To record Dan’s investment, repeat the transaction using Contributed Capital - Dan as the Withdraw From account.

Example: Recording an Owner’s Draw

Eventually, the business will start to earn a profit and as Dan and Felix withdraw funds from the business to pay themselves.

They will take money out of their business’ bank account and transfer it to their personal account. Let’s say on January 31st, 2014, they each take out $1,000 from the business.

  1. Go to the Journal Entries page and Enter Transfer:
  2. Date: January 31, 2014
  3. Amount: 1000
  4. Withdraw From: Bank Account (this is your business bank account)
  5. Deposit Into: Owner’s Draw - Felix
  6. Click on Add Transfer

That transaction will record Felix’s draw. To record Dan’s draw, repeat the transaction using Owner’s Draw - Dan as the Deposit Into account.

Example: Recording expenses personally paid by the partners

As with sole proprietorships, owner’s in a partnership also end up using their personal money to pay for business expenses.

Because these personally paid expenses are not official investments by the partners, one strategy to keep track of this personally paid money is to setup a loan account for each partner. To setup a loan account:

  1. Go to Accounts page and in the top section, enter:
  2. Name: Loan - Felix
  3. Type: Other Current Liability
  4. Then click on Add Account

This will setup a loan account for Felix. To setup Dan’s loan account, follow the same steps but use Loan - Dan for the Name.

To record a personally paid expense by Felix, who on January 10, 2014, went to Staples Business Depot and bought office supplies worth $50:

  1. Go to Income and Expenses page and Enter Expense:
  2. Supplier: Staples Business Depot
  3. Paid From: Loan - Felix
  4. Date: January 10, 2014
  5. Category: Office Expense
  6. Price: 50
  7. Click on Add Transfer

For the business to repay Felix for that personally paid expense at the end of the month:

  1. Go to the Journal Entries page and Enter Transfer:
  2. Date: January 31, 2014
  3. Amount: 50
  4. Withdraw From: Bank Account (this is your business bank account)
  5. Deposit Into: Loan - Felix
  6. Click on Add Transfer

Corporations

Incorporated businesses are legal entities that pay their own taxes and have their own bank accounts. Corporations thus have slightly different terminology than Sole Proprietorships and Partnerships.

Corporations pay their owners and receive money from their owners in several ways, each with different legal and tax implications.

Note: We advise you consult with an accountant to decide which of these methods below are most appropriate for your business and how to setup and use the accounts to move money in and out of it. There is an Accounts page to setup accounts, a  Transfer page to move money between two accounts, and a Adjustments (journal entry) page to move money between several accounts.

Capital Investment

When the corporation forms, the owner or owners will have to put money and assets into the business in order for the business to start to operate. This is called investment.

In return for their investment, the shareholders are issued shares of the company. For this reason, the capital accounts are never reduced unless the shareholders sell their shares back to the company.

Often corporations avoid taking real investment in terms of dollars and assets because in doing so they assign a value to their shares and thus the business as a whole. It’s quite common, for example, to have each founder pay a dollar in return for shares in the business. The other assets are contributed to the business as a shareholder loan, which is repaid when the business earns a profit.

Shareholder Loans

If a shareholder contributes assets (including cash) to the business and is not given additional shares in the business (or other assets) in return, then the business owes the shareholder money. This is usually recorded as a Shareholder Loan. Shareholder loans are normally handled in much the same way that the partnerships loans are handled above.

Management Salaries

Management salaries are paid to owners who work for the business as employees. To record management salaries, follow the same procedure as you would for recording payroll. Management salaries, unlike owners’ draws, are an expense for the business rather than a special type of equity transaction. The corporation will usually have to remit income tax, social security, employment insurance, and other government taxes that have been withheld when management salaries are paid.

Dividends

Dividends are a corporation’s way of distributing profits to its Shareholders (owners). Corporations often have special rules and precedences for the way that dividends are paid, and to whom, in their articles of incorporation. In addition, dividends often have special tax implications, so it is best to consult with a tax advisor.

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