Capital Accounts & Retained Earnings

We recently did a forecast of our profits for the month of Jul 2015, and decided to pay-off partners with a certain percentage (below 50%).

Please correct me if the entries I used are correct:

  1. As it was paid from our daily cash, I used the “Spend Money” option under Capital Accounts and under each partner. Now my Capital Account shows a negative balance. Is this correct?

  2. As there is a negative balance in Capital Accounts, I passed a Journal Entry debiting Capital Accounts & Crediting Retained Earnings account. Can this be an accurate entry?

P.S.: I used the “Spend Money” option in order for my daily hard cash in hand to tally with the Cash in Hand account under Cash Accounts.
So, Is there a way that this share of profit “Spent” under cash accounts and my Capital Account & Retained Earnings get balanced.

Until profits are allocated to your capital account, usually at year end, your capital account will remain in debit. To allocate profit to the capital accounts, debit Retained Earnings and credit Capital Accounts.

Not sure what you mean by “negative”. The capital account balance should be in debit as a result of this transaction.

If you are using newer version of Manager, under Capital Accounts tab, you will see two columns for each partner

  • Paid in advance
  • Amount to pay

The figure you have paid to partners should be under Paid in advance column because they have received money from partnership before retained earnings were distributed. Don’t distribute retained earnings just because they owe money to partnership. It’s OK to owe to partnership. Wait until financial year is over and then distribute profit.

Typically you would have selected the sub account Drawings, which is the contra account to your capital account. At year end (or period end) you will want to close your Drawings account to a zero balance so you should record the journal entry debiting Retained Earnings and crediting your capital account sub account Share of Profit. You would then record an entry to credit your Drawing account and debit your Share of Profit account.

I followed these steps and I was able to create “Amount to pay” in capital account by:
DR - Retained Earnings
CR - Capital A/c (sub-account: Share of profit)

But now, how can I make an entry to show that company has now paid this amount to capital account and the balance is zero now. Please help.

Please don’t double post Oving funds from retained earnings to capital accounts You have already created a topic for this conversation.