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QuickBooks Tips Blog

Using Equity Accounts In QuickBooks

Posted by Joe Mazur on Jan 20, 2014 6:14:00 AM

It is extremely important for business owners and shareholders to properly track the money they may contribute to the business or draw from the business. QuickBooks makes tracking these transactions easy once the equity accounts are properly set up within the Chart of Accounts.  Whether someone is contributing money for a stake in the company or an owner is drawing funds out in lieu of payroll, equity transactions are important come tax time and for monitoring startup costs.


Setting Up The Chart Of Accounts

Putting the proper steps in place when you start your books will lead to big benefits down the road.  Your CPA will love you because you will be able to show them owner contributions and draws with a click of button and there won't be any confusion as to where the money came from or where it went.   QuickBooks automatically sets up a few accounts within the Equity category, but I always advise owners and bookkeepers to set up accounts specific to the owners and shareholders.  Set up a parent equity account with the initials of each vested owner of the business, then set up two sub-accounts to show draws and contributions.  It should look something like this:

  • JZ Equity

    • JZ Equity Draws

    • JZ Equity Contributions

Doing this allows for a QuickReport (control+ q is the keyboard shortcut for this) to be pulled in seconds and it is easy to decipher what money was contributed and what money was drawn.  It may sound simple, but a startup business can tell you that money comes from many different directions when getting started and cash flow is tight.

Recently, I've seen start-up business owners put their personal credit cards, PayPal accounts, checking accounts on the books since these financial accounts are the main source of funding to cover startup costs.  QuickBooks doesn't handle Online Banking for equity accounts so these high volume credit cards, bank accounts, etc. need to be set up as if the company owns them, even though they don't.  If at some point the business is in a position to use its own internal funds, these account balances need to zeroed out and the accounts need to be made inactive.  Booking an entry to these accounts against the owner equity contribution account allows the accounts to be cleaned up while still maintaining the accuracy of the startup costs.  Since this is a non-traditional way to do bookkeeping, I prefer to zero these accounts out against owner equity on a monthly basis so there isn't any confusion come tax time.

Tracking Start Up Costs


Many prudent business owners understand the benefits of tracking startup costs.  Paying close attention to startup costs allows for easy growth and scalibility down the road.  Not knowing how much was spent to get a business to the stage of turning on the lights and getting revenue is a big question mark for investors.  Restaurant bookkeeping can be daunting, but it can pay off big time when a certain level of revenues and customer demand is met and new locations need to be opened.  Restaurants especially have a tough task of opening new locations if the startup costs aren't figured out.  Being able to show investors a solid set of books with the exact costs to get a new location started speaks great volume.  

 

The bottom line is that every business owner should treat their business as if it always needs to be investor ready and startup costs need to be tracked to the penny.  Having a lackadaisical approach to this can really come back to haunt you in the future.  Like most things in life, hard work in the beginning pays off big time down the road.  

Learn 10 Reasons your business should Outsource Bookkeeping!

 

Topics: Do It Yourself Bookkeeping, Efficiently Using QuickBooks, Starting A Business, Small Business Owner