Hi, I am a sole trader, I have added a Drawings account under Equity and a Contributing Funds Account under Equity also, is this right?
Your contributed funds should be in your personal capital account. But normally, a small business would set things up so retained earnings are also there. Manager handles retained earnings more like a corporation. This is not incorrect by any means, just a little different than most small business, where retained earnings is referred as owner’s equity, since as a sole trader you own it all.
Here is a recommendation to make things a lot simpler. Rename your
Retained earnings account as
Owner's equity. Get rid of the drawing and contributed capital accounts. The drawing account would be a temporary account anyway, transferred to owner’s equity at the end of the year. When you contribute funds, allocate them directly to owner’s equity. When you take money out, allocate the payment to owner’s equity. That way, you have fewer accounts and don’t need to make any transfers. To implement this, you will have to go back and recategorized your contributions and draws (if any so far). Once you’ve done that, you’ll be able to delete the unnecessary accounts.
As a side comment, you couldn’t do this if you were a partnership or corporation (or whatever those forms of organization might be called wherever you are). You can only do this if you are a sole trader/proprietor.
Thank you for your response but I can not find a Retained earnings account. Where do I find it, its not listed in my Chart of Accounts. I just checked and if I take out the names of the two I have added, Drawings is in the retained earnings account and funds contributed is in Capital Accounts, should this be the other way round, and if so, how do I do that now that I have allocated items to them, not a great deal! So sorry to be a pain!
So, I have re read again and again to make clear, so what you are saying is all drawings whether in or out should go in the Owner’s equity account, which I can rename Drawings. is this right? and the owner’s equity account should be the Retained Earnings Account renamed.
Can I suggest as a Sole Trader you don’t use Manager’s Capital tab but instead create accounts directly under the BS Equity section via Settings - Chart of Accounts. When you Add a Business in Manager - Retained Earnings is an automatic default account under Equity
Equity accounts for sole traders “can” include:
•Owner’s capital – contributions made by owner
•Owner’s drawings – personal spending
•Accumulated profits (or loss) - Retained Earnings
•Current year’s profits (or loss)
Depending on the detail you want to track for/in future years you can keep all the accounts or consolidate the first three into one or two accounts. The last account (Current) can’t be consolidated. If you consolidate into one, then you could use/rename Manager’s Retained Earning account to Owners Capital/Contributions.
If consolidating into two, you would merge the capital and drawings account and leave the Retained Earning account, but as a sole trader I would rename it Accumulated Earning as “Retained” relates more to companies.
Call me old fashioned, but my preference would be to have all rather then consolidate any. In some countries Drawings can be part of their income tax return systems, so keeping it separate saves you having to analysis the consolidated account at year end. Doing a single year end transfer journal is much simpler. Check with an accountant on your local requirements.
At a minimum I would definitely keep the Accumulated/Retained Earnings separate for the following reasons: 1) as years go by you can readily see your businesses performance, 2) if you ever need to present your accounts for any reason, obtaining finance etc, your profitability will be clearly identifiable, and 3) in case you latter take on a Partner, convert to a company or even sell the business. Just some thoughts.
It sounds like you may have found it already. But, just in case,
Retained earnings appears automatically when you create a business. The default name follows the practice used for corporations/companies rather than sole traders. But it is the same thing: the net of all earnings, income, expenses, dividends, draws, and whatever since the inception of the company. Only in the case of a sole trader is it equivalent to owner’s equity.
No, that is not what I tried to convey. There are many ways capital accounts can be organized, so I did not say “should.” But, if you want, you can set up your chart of accounts so drawings come straight out of
Retained earnings. And contributions can go straight in. But if you do that, you should rename that account as
Owner's equity, not
Drawings. Doing so is simpler, but it also deprives you of instant visibility of contributions and drawings during a year. Even so, that information can still be recovered quite easily from Manager. For example, the Statement of Changes in Equity report not only provides it, but actually breaks things down in finer detail.
Again, I will not say “should.” I will say “could” for reasons I have explained. Your accountant, if you use one, may have strong preferences about how your chart of accounts is set up. And local tax and reporting regulations may suggest specific structure to the chart of accounts. If you plan to change the organizational structure of your business in the future, you might find additional detail useful.
All I was trying to do was show you an easy method for sole traders that keeps the chart of accounts simple and the number of closing and clearing entries to a minimum. It is still sound accounting practice and, in my personal opinion, clarifies the equity picture for a small company owned by a single person. It is also much easier to understand if you are not an accountant.
Thank you so very much, I have a better understanding now,you have helped me greatly!