Profit Distribution

Why is profit distribution being taken from Capital Accounts rather than Retained Earnings.

In my case, there is a business in which I am the 60% shareholder and numerous others owning the remaining 40%.

The funds contributed were a one time thing in the past and not there is no further investment from any shareholder. The business simply provides a percentage of the profit (in the event there is any) to each shareholder in proportion to their stake.

If I keep providing the profit from the Capital Account, it will keep reducing it and go into negative.

Is it me who is understanding it wrong or should it distribute the money from retained earnings?

1 Like

Not really sure what you mean.

Once a year, you should make a journal entry which will debit Retained earnings and credit individual members in under Capital accounts. This transaction is simply called profit distribution because it takes retained profit and allocates it to the accounts of individual members, partners or beneficiaries.

Ao! ok.

I suppose it was a terminology misunderstanding.

I assumed it the profit distribution would be the mechanism for share dividend.

Ill try it the other way around now.