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Accounting for Equity

Most of the changes to your equity accounts happen in the backgroundautomatically and without intervention from you. The Opening Balance Equity Account (OBEA), for example, is adjusted when you make entries that affect the opening balances of other accounts. For example, if you set up a new account to reflect your company's ownership of a $2,000 computer, the transaction is recorded like this:

	Debit	Credit
Fixed Asset/Computer	$2,000.00
OBEA		$2,000.00

The amount in the OBEA actually should be categorized with the company's net worth, so you might have to make a journal entry to reclassify this amount:

	Debit	Credit
OBEA	$2,000.00
Retained Earnings		$2,000.00

At year-end, QuickBooks automatically resets your income and expense accounts to zero balances for the new year. The net effect of this transaction is offset in the company's Retained Earnings account.

If an investor or owner puts money in the companynot as a loan but as a capital investmenta transaction like this might be recorded:

Debit	Credit
Cash	$10,000.00
Owner's Equity		$10,000.00

Recording Owners ' Draws

When owners take money out of a company that is not a corporation, the money is either classified as a loan or a draw. A draw account is an owner account that is increased by the earnings of the company and decreased by the amount of money the owner takes out of the company. Non-corporations need to set up a draw account for each owner. You might want to create a master equity account for all owners and then a subaccount under the master account for each individual owner's draw.

Set Up a Draw Account

Press Ctrl+A to open the Chart of Accounts.

Press Ctrl+N to open the New Account window.

Select Equity in the Typelist.

Enter a name for the account.

Indicate whether this is to be a subaccount of another account.

Enter an optional description.

Click OK to save the account.

Record an Owner's Withdrawal

Press Ctrl+W to open the check window.

Verify that the correct cash account appears.

Enter the name of the owner who is withdrawing money from the company.

Enter the date.

Enter the amount.

Enter the owner's draw account.

Click a save option.

Entering Prior Period Adjustments

After you've issued your company's financial statements for the year, you're not supposed to go back and change the numbers. Shareholders and investors have the right to assume that your financial statements provide final numbers for the year and that those numbers won't change at some point in the future. But what if the numbers really do change? What if some unforeseen information that invalidates some of the information on the financial statements comes in after the financial statements have been issued? Or what if you simply made a material mistake on last year's financials? Accounting rules permit a company to enter the change on the current year's financial statement by describing a prior period adjustment in the equity section of the balance sheet. Your balance sheet will show the balance in retained earnings at the beginning of the year, followed by the prior period adjustment to that balance. As for recording the adjustment in your QuickBooks file, you need to make a journal entry to correct the accounts. In this example, a change in the value of the ending inventory from the previous year has been discovered .

Select Make General Journal Entries from the Company menu.

Enter the date when this adjustment occurred. The date will be a current year date, not a prior year date.

Enter the accounts affected by the adjustment (a capital account such as Retained Earnings will be one of the affected accounts).

Enter the amount of the adjustment, offsetting the adjustment in the capital account.

Enter a memo that describes the fact that this is a prior period adjustment.

Click a save option.

Did You Know?

Only one line of description is necessary . When entering general journal entries, the top line of the description automatically carries through to all the lines of the journal entry, even though you see only the top line displayed in the entry.

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Accounting for Equity