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Just a simple accounting question.I had mistakenly labeled personal income taken out of my company as retained earnings instead of owners capital draws,and when correcting it the amounts on my balance sheet report for both accounts got higher.My accountant assured me this is correct,and I am not questioning that,but just trying understand and didn't want to waste my accountant's time schooling me.Why wouldn't changing income mistakenly labeled retained earnings into owners capital draws make the retained earnings go down?It seems to me the retained earnings number should drop as I redirect,on paper anyways,money from being labeled retained earnings to owners draws.
Based on what you said, your first entry would have been a credit to cash and a debit to retained earnings (the "normal balance" of retained earnings is in fact a credit). A debit to retained earnings actually reduces the balance. Keep in mind that a debit to any equity account "reduces" it.
Your second (correcting) entry should have been a credit to retained earnings and a debit to owner draws, or what I typically title as "distribution." This would in effect increase both retained earnings (back to its original balance) as well as the draw account (which has a debit balance, though it technically reduces equity).
Overall, there should not be a net change in total equity as a result of the correcting entry.
Last edited by BE in HHI; 06-14-2010 at 11:08 AM..
This is what happens when we try to not pay qualified bookkeepers and accountants to do this.
The bookkeeper didn't do anything wrong - BrightEyedLLC has it right... The accounts appear to both increase, but you have to keep in mind that one is credit and the other debit balance, which means that they offset one another.
Because assets less liabilities = equity - as both the account you use to track "draws" is equity as are retained earnings, when you made the corrections it's a wash
You reduced your equity by making a draw against it, but added to your equity by listing them as retained earnings.
(and I agree with random - for whatever reason some seem to have decided "it's so simple a caveman can do it" - until they run into trouble that is)
This is what happens when we try to not pay qualified bookkeepers and accountants to do this.
It's an interesting discussion, for sure, and I think it (not utilizing a qualified accountant or at least a good bookkeeper) is a leading cause of small business failures. You would not believe how many small business owners I come across that have no idea of their true financial standing.
On the other hand, there is nothing wrong with someone doing their own bookkeeping and accounting so long as it is 1) actually done and 2) done correctly.
Quote:
Originally Posted by Opyelie
(and I agree with random - for whatever reason some seem to have decided "it's so simple a caveman can do it" - until they run into trouble that is)
As I said elsewhere, I blame Sage and Intuit for creating the mentality that anyone can do their own bookkeeping and accounting. On the plus side, there is good money in straightening out poor accounting assuming the client actually has the financial means to pay.
As I said elsewhere, I blame Sage and Intuit for creating the mentality that anyone can do their own bookkeeping and accounting. On the plus side, there is good money in straightening out poor accounting assuming the client actually has the financial means to pay.
Well I agree with you regarding Intuit and QB, but which Sage software are you referring to? MAS-90 can be a bear (if incorrectly setup in the first place, especially), as can MAS-200 and let's not even think about Timberline = )
That said, I'm unemployed right now, but I have an awful feeling that when I am re-employed I will once again be in the position of "fixing" the screwups - sigh.
It's not enough to just be able to enter data (correctly, we hope) and press a button to print out a financial statement.
UGH - Can't STAND Peachtree - I forgot that was one of the Sage buy ups (along with Great Plains which also sucks imho)
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