How to Properly Record Owners’ Distributions and Contributions in QuickBooks Online

One of the most important yet often misunderstood aspects of bookkeeping for small business owners is how to properly record owners’ distributions and contributions in QuickBooks Online (QBO). Failing to record these transactions accurately can cause confusion in your financial statements and distort your equity balance.

In this post, we’ll guide you through what owners’ distributions and contributions are, why they need to be tracked separately from regular expenses or income, and how to record them properly in QBO.

What Are Owners’ Distributions and Contributions?

1. Owners’ Distributions
   An owner’s distribution refers to the money or assets withdrawn from the business by the owner for personal use. For sole proprietors and partnerships, these distributions are not considered wages or salaries, and they aren’t taxed as income to the business, but they do reduce the owner’s equity in the business.

2. Owners’ Contributions
   An owner’s contribution (or capital contribution) is money or assets that the owner puts into the business. This can include cash injections, equipment, or personal funds used to pay business expenses. Contributions increase the owner’s equity in the business.

Both types of transactions impact the owner’s equity, which represents the owner’s claim to the assets of the business.

How to Properly Record Owners’ Distributions and Contributions in QBO

To keep your financial records accurate and maintain a clear picture of your equity, you need to properly categorize owners’ distributions and contributions in QuickBooks Online. Here’s how:

1. Set Up Equity Accounts in QuickBooks Online

Before recording these transactions, you need to ensure you have the correct equity accounts set up in your Chart of Accounts. Typically, you’ll need the following:

• Owner’s Equity: This account tracks the owner’s total investment in the business. Contributions and distributions are recorded here.

• Owner’s Draw (Distributions): This sub-account of Owner’s Equity account is where you’ll record withdrawals or distributions taken by the owner.

• Owner’s Contribution: This sub-account of Owner’s Equity account records any funds or assets the owner contributes to the business.

To create these accounts:

• Go to Transactions > Chart of Accounts > New.

• Choose Equity as the account type and Owner’s Equity as the Account name and the Detail Type.

• For the owner’s draw, you might name the sub-account “Owner’s Draw” or “Owner’s Distributions,” and for contributions, name it “Owner’s Contributions” and select Owner’s Equity as the Parent account.

2. Recording Owners’ Distributions

When the business owner takes money out of the business for personal use, it’s considered a distribution. Here’s how to record it in QuickBooks Online:

• Go to + New and select Check or Expense.

• In the Payee field, select the owner’s name.

• In the Category column, select the Owner’s Draw (or Owner’s Distribution) account you set up earlier.

• Enter the amount of the distribution.

• Add a description if necessary to describe the transaction.

• Save the transaction.

This will reduce the owner’s equity and will not show up as a business expense on your Profit & Loss report, keeping your business finances separate from personal withdrawals.

3. Recording Owners’ Contributions

When the owner contributes cash or assets to the business, this increases their equity. Here’s how to record contributions:

• Go to + New and select Bank Deposit (for cash contributions) or Journal Entry (for non-cash assets).

For Cash Contributions:

• In the Account field, select the bank account that is receiving the funds.

• In the Received From field, select the owner’s name.

• In the Account column, select the Owner’s Contribution account.

• Select the payment method and enter the amount of the contribution.

For Non-Cash Contributions (e.g., equipment or assets):

• Create a Journal Entry.

• In the Account column, choose the appropriate asset account for the item contributed (e.g., Office Equipment, Vehicles).

• In the Debit column, enter the value of the asset.

• On the next line, select the Owner’s Contribution account.

• In the Credit column, enter the same amount.

• Save the journal entry.

This will increase the owner’s equity while reflecting the contribution accurately in your financial statements.

Common Mistakes to Avoid

• Don’t Mix with Expenses: Owners’ distributions and contributions should not be recorded as regular expenses or income. They should be treated as equity transactions, as they do not affect the Profit & Loss statement.

• Accurate Categorization: Always ensure that withdrawals are categorized as distributions and contributions as equity. Misclassifying these transactions can result in inaccurate financial reports and could complicate tax filings.

• Track Personal vs. Business: Owners sometimes use personal funds to cover business expenses or take money out of the business for personal needs. Be diligent in tracking these transactions separately from regular business expenses and income. Using dedicated equity accounts helps prevent confusion between business and personal finances.

Why Properly Tracking Owners’ Distributions and Contributions Matters

Correctly recording owners’ distributions and contributions ensures your financial statements are accurate and compliant. Misreporting these transactions can:

• Distort Your Profit & Loss Reports: If distributions or contributions are categorized as expenses or income, they will skew your Profit & Loss report, making it hard to see the true financial health of your business.

• Affect Equity Balances: Failure to track contributions or distributions will result in an inaccurate picture of the owner’s equity, which can make it difficult to assess your business’s financial standing.

• Create Tax Issues: Proper categorization is essential for tax purposes. Distributions are not subject to income tax, while contributions affect the owner’s capital gains tax when the business is sold or transferred. Incorrect reporting can cause complications during tax season.

Accurate bookkeeping is essential for managing your business finances effectively. Recording owners’ distributions and contributions properly in QuickBooks Online helps maintain clear financial records, gives you a true picture of the business’s equity, and avoids potential tax issues.

If you’re unsure how to handle these transactions or need help setting up equity accounts in QBO, our team of experts is here to assist. Contact us today to ensure your financial records are organized, accurate, and compliant!