Payslip amount on balance sheet in employee clearing account & equity-retained earnings

Just checking my setup before I enter any more data. I have not done spend money just a payslip.

On Summary, Payslip appears on balance sheet as + in employee clearing account and PAYG (which I see as correct) and - under Equity - Retained earnings. Also appears as + under salaries & wages expense on P&L summary. Business is a sole trader and I am using cash accounting. I understand the balance sheet must ‘balance’ but don’t understand why the retained earnings is being used for this.

On Balance sheet summary ‘Drawings’ also appears under Equity, an account I will allocate any private portion of expenses to. What is the difference between drawings & retained earnings?

Also, is it necessary create subaccounts under employee clearing acount for each employee?

Cash basis accounting does not accurately represent your financial position when there are pending payments. You owe the employee money, but cash basis accounting only recognizes an expense when money is paid out. I strongly recommend accrual basis accounting if you have either employees or inventory.

Retained earnings is the net of all inflows and outflows since inception of the business that have not been transferred to some other equity account. It really is not typical for a sole trader to use a retained earnings account. Corporations use them until dividends are paid out to distribute earnings. See this Guide:

Drawings have already been withdrawn from the company by the capital account owner. Retained earnings are awaiting distribution. Both are unnecessary for sole traders. They can be used, but add complexity.

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The Profit & Loss Statement is a net total report (Income minus Expenses) with the differential being either a profit or loss. The Balance Sheet is as you understand - it must ‘balance’ because Assets minus Liabilities = Equity. Therefore, to make the Balance Sheet balance the Profit & Loss net total (profit or loss) has to be transferred over to the Balance Sheet and is recorded as Retained Earning - or in other words - P&L net total transferred to Balance Sheet.

In more traditional times, this transfer was known in the Equity section as “Current Earnings” and at the end of the financial year it was rolled over to Retained Earnings in readiness for the next year’s “Current Earnings”. With computerization this has been truncated to just Retained Earnings

Thankyou for your helpful reply. I have amended Retained Earnings to read Owners Equity as suggested. I am unsure on the comment about Retained Earnings & Drawings accounts both being unnecessary for sole traders? As the business is on the same property as private residence there are many expenses which have private use %. I have previously always allocated this private use to ‘Drawings’ as I learnt in accounting albeit many years ago. I assume now you suggest that all private expenses should be allocated to the renamed equity account ‘Owners Equity’ and I should delete my ‘Drawings’ account which is also shown under Equity on BS? My previous BAS manual working out required subtracting the private (Drawings) column so as to calculate the GST correctly. I assume this program will automatically work GST out for BAS lodgement and no separate drawings account necessary?

Sorry for double checking on all this but I am stepping up from an Excel spreadsheet where I had manual control over everything, no balance sheet prepared at all and I transferred figures to prepare a P&L for tax prep.

If you are going to rename the Retained Earning account to Owners Equity, then you only need the one account. Contributed Capital account and Drawing account get rolled over into the one account.

Yes, private expenses would be allocated to Owners Equity, however to delete the Drawings you will need to edit all existing transactions and change the Account allocation. You can’t just transfer the balance over.

Yes it will work automatically, but only If you allocated the private usage component at the time of processing the transaction, then the business P&L (nor Tax (GST) account) wont contain any private expenditure. EG if the rates are 100 and are split 50/50 then the rates would be entered as

Account = Rates, Amount = 50, Tax = GST 10%
Account = (Drawings), Amount = 50, Tax = Nil.

So the P&L Rates would show 45.45, the BS Tax (GST) Payable 4.55 and the BS (Drawings) 50.00. The BAS should ignore the Drawing transactions

Thanks. Haven’t entered any transactions, only sales invoices since July 1 & a trial pay slip, so no problem to delete drawings account if that’s best accounting practice. (But in your example you refer to BS (Drawings) so wondering if in fact I could rename Owners Equity to Drawings, which I’m used to? I gather they are interchangeable terms?)

I shall do a backup first and plan to just import bank statements & allocate all the transactions as it appears to be the quickest way to do it seeing as I am catching up on 3 mths of accounts. Only other thing to consider is super which I left blank on payslip & plan to just allocate the super payment to super expense account when it is made. I can learn about that later.

It is one form of (modern) presentation, not of the classic style as you probably learnt it.

No, in the illustration I was making reference to your initial terminology - Drawings - rather then the newer concept of “all in” Owners Equity - hence the brackets.

Just create a Payslip Contribution Item, then each payslip can create the expense as you go and the amount payable to the super fund being accumulated in the BS

You cannot use a drawings account unless you are employing capital accounts. It is one or the other. Using a capital account with its subaccounts (contributions, drawings, distributions) for a sole trader is not wrong, it is just unnecessary. That is because, as a sole trader, you own everything in Retained earnings already.

Yes.

I really can’t say. I’m not in Australia and have no experience with the BAS worksheet or ATO tax filing requirements. It could well be that there are requirements that make the simplified equity accounting an unwise choice. I mentioned it as an option, but only if all the circumstances are right.

Yes you can, in the Equity section you can have the three accounts as set up in the traditional way.
Only modernism truncates the three accounts into one and then rely upon a Capital Report for analysis.
Capital accounts are for partnerships not sole traders

Standard accounting still applies, even if its not a specific Manager feature

True. I was referring to the default Manager setup.

Manager doesn’t have a single use “Owners Equity” (renamed Retained Earnings) account as a default setup for sole traders. That is a Users adopted setup promoted as a default.

Manager has Capital Accounts and if used by a sole trader can be renamed, as per the guides.

Beneath that re-named account still exists the sole trader sub-account - Drawings.

To be clear, I was not suggesting that the renaming of Retained earnings as Owner's equity was a default setup. My reference to the default setup concerned your statement about using individually created equity accounts. I was originally trying to steer @elouera towards an understanding that Manager’s default arrangement for capital accounts included the drawings subaccount.

I also pointed out that using the capital account features for a sole trader was not wrong, just unnecessary in some situations. I wasn’t as rigorous as I might have been. You correctly pointed out there are other ways to do things, which I acknowledged. In trying to keep things short, I may have added to confusion, for which I apologize.

I am now setting bank rules and allocating bank transactions from 1 July and I have come to a transaction relating to private use. Owners Equity (which was renamed from ‘Retained Earnings’) is not in the drop down list of accounts. And as I have deleted ‘Drawings’ as suggested above it is not in there either. So I cannot categorize private expenses.

In the chart of accounts and Summary page, Owners Equity (retained earnings in grey) appears as sub account under Equity.
There is also an account on Summary called ‘Starting Equity’ which has shown up since I inputed the GST & PAYG amounts owing on June BAS as opening balances on GST & PAYG liability accounts as per the forum. (ready to allocate paid amounts in July/August bank import).
I did not input a starting balance for Owners Equity as I did not know what to put as I was changing from manual system with no BS.
Please help!

It should be. Are you sure you scrolled all the way down in the Account dropdown box?

This is normal if you have opening balances for balance sheet accounts. Without quite a bit more detail, no one can tell if what you see is correct.

The question is whether you had any money invested in the business when you started using Manager. Remember, equity is just the difference between assets and liabilities. How to handle this also depends on whether you are doing cash basis or accrual basis accounting. You may need to consult an accountant to be sure you are setting things up correctly.

Ok when I ‘Edit’ the transaction to allocate, I see it actually is in the drop down list. But when I try to create a bank rule it is not. Just trying to set an income protection direct debit to allocate straight to personal but maybe this is not possible.

I think starting equity is correct as it is the net of 3 entries: Bank balance @ 1.7.16 (one credit) and starting balances I inputed for June Qtr PAYG & GST (2 debits)

I might need to check with accountant re Owners Equity starting balance, but if I am right, the starting balance shouldn’t effect the accounts for BAS prep so no need to worry today?

For the Income Protection Insurance, you will need to edit and allocate rather then use a bank rule.

For starting equity, under Reports run General Leger - Starting Balances. The Retained Earnings opening balance should equal Bank & Tax entries.

However you wrote “Bank balance @ 1.7.16 (one credit) and starting balances I inputted for June Qtr PAYG & GST (2 debits)”

This implies that the Bank account was overdrawn and the PAYG & GST was owed to you.
If you had funds in the Bank account then it should be debit and if you owed the PAYG & GST then they should be credits.

I was drilling down on the starting equity figure from the summary page, where the debits and credits are as I described.

But when I looked at the General Ledger report as you suggested, the Starting bank balance is in the debit column at the top of Asset/cash and PAYG & GST opening balances are in credit column at top of Liabilities/GST payable & Liabiities/PAYG withheld payable which I understand is correct. So it is showing opposite when you open up from summary page…

The General Ledger Starting Balances report shows debit Assets - cash (bank account balance) = credit GST payable + PAYG withheld + ‘Starting Balance Equity’.

Ok, so with the Starting Balance Equity figure you need to enter that as the opening balance for Retained Earnings