Owners Draw or Owners Deposits and entering them into QuickBooks Online can be confusing.   Maybe you don’t know which account to put them in?  Or even if you should have this type of account on your books. 

So, what is the difference between Owner’s Investment and Owner’s Pay?  Well, the first question you want to ask yourself is what type of entity is the company? Is it an LLC or Sole Proprietor?  Is is a C Corp? S Corporation? If you are unsure and you are working for someone, go to Gear>account.  Scroll to settings and see if the owner entered the tax return type in that window. 

The article below is specifically for a sole proprietorship type business and not a company that is an S or C Corporation with payroll.  See this post regarding payroll settings QBO.  I will do a future blog post on company’s that have payroll and the owner mixes personal expenses.

Sole proprietorship and using the owner’s equity account…

I am not a fan of the new category you can select in QBO that is called “Owner’s Pay and Personal Expenses“. When I think of “pay”, I think payroll.  And this is not the case when the owner of a sole proprietorship takes money out of his business.  At least not in the Quickbooks entry.   They may not be there by default depending on how the person who created the file chose to enter their chart of accounts.  For clarification:

• ​Owner’s Investment is when the owner invests personal money into the business.
• Owner’s Pay or withdrawals is when the owner is paid money out of the company for personal use.

Owners draw:  Why isn’t this an expense for the business?

Owner’s equity parent account, like it is set up in the video, is one of the three parts of a sole proprietorship’s balance sheet and accounting equation.

Owner’s equity represents the owners investment in the business minus the owners draws or withdrawals from the business plus the net income (or minus the net loss) since the business began.  This is why I like to use the sub accounts that you can roll up into the parent account, owner’s equity.

Owners draws or withdrawals is never an expense.  It represents a reduction of owners’ equity in the business. Therefore, the draw account is intended to track distributions to owners in a single year.  After which, it is closed out (with a credit) and the balance is transferred to the owners’ equity account (with a debit).    I set it up like this in the Chart of Accounts:   (See this Intuit support article for how to set up these accounts in Quickbooks)

Owner’s Equity (parent acct.)

•      Owner’s investments
•      Owner’s Withdrawals

So, if the owner deposits personal funds into the business….

So, this is an Owner’s Investment transaction.  Adding to the business.  Remember this is not income and is not going to show on the Profit and Loss report at all.

What if the owner buys personal items with the business checkbook?

It is an Owner’s Withdrawal.  Taking away from the business.  Remember, this is not an expense transaction and is not going to show on the Profit and Loss report at all.

If you have any questions or would like to see a future video on another topic, please reach out to me on Facebook.