 QuickBooks Online 2024, inter-transaction for owner withdrawal or personal payment using bank feeds. Get ready and some coffee because we're going to make our books shine with QuickBooks Online 2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our QuickBooks Online Bank Feed Practice File. We set up in a prior presentation. Opening the major financial statement reports like we do every time. The reports on the left hand side. Within the favorites we're going to be right clicking on that balance sheet to open a link in a new tab. Right clicking the profit and loss otherwise known as the income statement. Open linking a new tab. Right clicking the trustee TB trial balance to open a link in a new tab. If you don't have that trustee trial balance here in the favorites you can search for it. We're going to tab to the right. Close the hamburger and change the range. First two months of 2024. One two four tab 022924 tab. Selecting the drop down. We want to see the months side by side then we will run it to refresh it. Tab into the right repeating the process. Another rep of the same thing changing that range in 010124 tab 022924 tab. Dropping down for the months and run to refresh and then tab into the right one more repeat of the process. And we're going to go 010124 tab 022924 tab. Drop down months run it to refresh it. Alright let's go back on over to the balance sheet. Now we're going to think about a situation where the owner is taking money out of the business. So a couple things up front that we need to consider it might look a little bit different in terms of the type of entities that we want to be touching on. And we also want to touch on when it might be the case that an owner is going to be taking money out of the business as opposed to putting money in the business. So when we start the business usually we have our accounting equation assets equal liabilities plus equity. Normally we have to have some startup capital in the business in the form of often cash. Why because we need to use that cash to purchase stuff and we need to purchase things such as the fixed assets. And the inventory that's usually what we need the money for to start up. We can't get the money from customers because we need the fixed assets in the inventory before we can sell stuff to the customers. So the initial financing will typically come from the bank possibly in the form of a loan from the mafia. No don't don't go to them. That's that's a bad idea. But and then and then the and then the equity the owner the owner putting money in for that initial investment. So in owner's equity we would see that initial investment going in with like an owner investment if it was a sole proprietorship or partnership. And it would be in the form of capital or common stock the issuance of the common stock if it were a corporation. Then once the business starts starts making money hopefully because we're going to earn revenue off of the machinery and equipment and the inventory. Then we might start to compile the cash might start to increase noting that the business is not designed to compile cash because the ideas that we want to have the business separate from the personal books. So the business isn't designed to just have a it's not like Scrooge McDuck swimming in cash. That's not how it actually works. We only want the cash in the business if we need it in order to reinvest in machinery equipment investment and inventory to help us generate more cash and revenue in the future. If we have cash that we're not planning to reinvest we shouldn't just hold it in the business we should then give it to the owner and that's what we're talking here in the form of draws. So that's when the money would come out to the owner in the form of draws. Now this gets a little confusing because draws can be seem different depending on the type of entity you are in. So you will recall that if we have assets equal liabilities plus equity or assets minus liabilities equals equity. You can think of equity then as the net value of the business and then so equity is the owner's claim to the assets in the business. If it's a sole proprietorship then you only have one owner. So that's fairly straightforward. If it's a corporation you could have I mean if it's a partnership you could have multiple owners multiple partners. If it's a corporation then you have multiple owners but it's actually a little bit easier often times than a partnership because we're going to allocate the ownership per stock not try to track each of the individual capital accounts. So how does that play out when we draw money out? Well if it's a sole proprietorship your small business you just use it for your schedule C or something like that then when you pull money out of the business you're going to want to have another account typically that's going to be called draws. It's going to be an equity account and you can track the equity account as you pull money out. Possibly you can close out the equity account to retained earnings which should be called like owner's investment or like a capital account for a sole proprietorship. Retained earnings is a corporation name. So we might actually want to change that if it's a sole proprietorship to like owner's equity. If it's a partnership however then you're going to have multiple capital accounts you could have five partners and each one of them is going to need their own capital account. And they're going to need their own draws account typically assigned to that partner because you have to track each individual partners kind of like the sub ledger for accounts receivable in the equity section. You're tracking the value that's being claimed in essence by each individual partner which could be different based on the partnership income sharing agreement and the amount of draws that each partner has taken out which doesn't necessarily have to be even. If it's a corporation then retained earnings is the proper name for the accumulation of the revenue that has not yet been distributed and then the investments will be the issuance of the common stock. And you don't have to break out the equity per shareholder like you do with a partnership because it's going to be allocated to the partners evenly based on the number of shares that they own. So that's the beauty of a corporation. The problem with a corporation however is that a sole shareholder of a corporation although an owner can't just take money out of the corporation because in order to keep all equity accounts the same everybody has to be distributed the same amount. Therefore draws for a corporation aren't really draws. They're called dividends which has to go through a board of directors and after the company has to decide to give dividends as opposed to a sole proprietorship or partnership which are more likely to just be able to pull money out if there's cash in the business. All right. So that's going to be the general the general idea. Now when the draws happen on the bank feeds when I go to the tab to the left and we go down to the transactions and we close this out. Let's say that we're going to say this is going to be bank transactions and we're going to say money out. So when we see cash withdrawals then what we would like to see from from the bookkeeper perspective whether we're doing our own books and particularly if we're doing someone else's books. Anytime they take money out of like an ATM or just take money out we would like to assume be able to assume that that was taken out for personal use. You're taking money out of the business for your own personal purposes and we're going to call that a draw decreasing the equity account. Sometimes people like to pay their business expenses with cash still which in some cases that might be reasonable but that's tough on the bookkeeper right because if you take the money out as cash and then you buy it. And then you buy something business related with it like supplies then the bookkeeper doesn't have an audit trail with just the electronic transfers. They're going to have to ask you what you spent it on and you're going to get into tracking receipts and that kind of thing which we don't need to do anymore. Oftentimes we won't want to do as much of that anymore because you have the audit trail. So so the general idea is this note that if I if I go to the income statement over here all all of the expenses from a tax perspective for the United States are typically business expenses. So these are business expenses possibly and if they're business expenses they're good their deductions everything's flipped on its head for taxes we like the expenses their deductions for taxes. We want to go to the tax man with holes in our shorts and in our pants and saying hey we don't have any money right we want we want to loss right we want to have low income because it's an income tax. So the expenses are actually are actually good. And so the IRS is going to be skeptical of expenses. So if you get audited they're they're going to be double checking that your expenses are legitimate. And we want to be able to have an audit trail of the expenses so you don't want to erase the audit trail for the expenses if they're legitimate business expenses for taxes. You want to make sure you have the audit trail if possible in the event of an audit so that you could say yeah that was a legitimate deduction. Here's the transaction here's the wire transfer connected to my bank it went out of my bank account you could see it right there you could see where it went. So however there are sometimes when when you might still want to pay cash maybe cash is still King cash could go further sometimes if you're tipping someone then it's it's like you don't really what you cash might go further because if you if you if you tip them with an electronic transfer their boss is going to take half of it or whatever you know who knows. So so you can so so you could still have the situation where cash is affected but you would like to be able to say every time there's a draw I would like to be able to assign that to a draw instead of an expense account I'll take a look at the differences here now also note that you could have a situation where many small businesses are not good at separating their personal finances from their business finances because ideally you would like to have two separate checking accounts personal and business and only use the business account for business related things but sometimes people just aren't good at that and they spend a bunch of personal stuff out of their business account and we see it come through the electronic transfers. Well the question then is what do we do in that situation well in that situation we could simply it's it's not the end of the world right we could what should have happened is they drew the money out in cash as a draw so we can see it and then they spent it from their personal account on the personal stuff that would be easier to track on the bookkeeping side. However if they if they paid their own rental company out of the business account what we can do is we can just assign that transaction to a draw right. That's one thing that we can do or another thing we can do we can we could create a class tracking system to have both the personal and the business drawn out. All right so that's so let's first imagine that we saw this ATM this comes through the bank feeds someone pulled out money let's imagine the ideal scenario the owner just drew money out so I'm going to say all right that's going to be that's going to be owner let's just say owner if there are multiple owners then I have to identify which owner took it out if it was a partnership but I'm just going to say it's the owner and then we're going to say that's going to be the vendor it's not really a vendor but we have to set something up and then notice it's already allocating it to the draws so it's going to draws which is an equity account owner. See if I can owner draws now I lost it. I was trying to find it here so we can equity owner draws it's an equity account that's the points if you have to set one up you want to make it an equity account. So there it is and this one you probably don't want to make a rule for because maybe the not every draw is going to be going to equity so I won't make a rule for it. But but you could if you could make the assumption that every time you see like an ATM withdrawal that it's going to be going to the equity account. Okay let's save that and see what it looks like if I go on to the balance sheet and run this then I can see that this is going out of the checking account. I forgot which side it was on owner draw February. So $300 going out of the checking account it's still going to be an expense type form although it's not going to be hitting an expense account down here it's hitting draws. The other side going to draws so on the equity section we have our draws. Now I would rename the retained earnings to like owner's equity if it was a sole proprietorship I think that looks more normal. So I'm going to go back on over here let's actually do that let's go to my chart of accounts and say this retained earnings. I'm going to edit it and make it owners equity I'm not sure if I got the posture feeling or in the wrong place equity I think that's right. So that that because retained earnings if I go back to the balance sheet is a name that's usually assigned to a corporation. QuickBooks has to use the one name for every entity because they're using one one chart of accounts no matter what you tell it in the interview process. But notice that this net income will roll into owner's equity automatically every year that's the closing process so if I was to go to 010125 to 010125 for example. Then you can see it roll in to the owner's equity and then you have the draws here netting out against it. Now also realize that draws from a clap from a from a textbook standpoint is also something that should close out on a yearly basis or possibly a monthly basis into the equity section. Typically you want to do it on a yearly basis possibly to help you out with your tax preparation and so on. So but QuickBooks doesn't do that automatically closes out the income statement to retain earnings or equity but not the draws. So if you want to close them out you'd have to do a journal entry every year to close out if you don't do the journal entry not the end of the world. It's just that this draws account will represent draws for the lifetime of the entity rather than draws for the current period the current year for example. Alright so and so let's go back to the prior so 010125 to 022925 to 0224 hold on a second 010124 there we go. Alright and so nothing happened to the income statement. If I go to the income statement we didn't it didn't hit the income statement that's the proper way to do it because if we hit the income statement with it. Then we would have an expense that's not legitimate which would be good for taxes because it would reduce net income but cause problems in the event of an audit because it was a personal withdrawal that you'd have to justify. Alright so then I'm going to go back on over and go to bank transactions and let's pretend the other one was was for not for personal use. So we're going to say this one they spent it on the business but I don't know what they spent it on so I can say OK this this was we're going to say that they spent it on. Owner we could say so if I don't know what they spent it on I'm going to say miscellaneous as the vendor tab. And then I'm going to say that it goes to let's say miscellaneous expense because I don't know where it goes. So I'm going to say OK if I don't know where it goes the bookkeeper does something like this. They're going to say expense account. He says it went to an expense account. I'll just say miscellaneous expense. I'll just say miscellaneous. Now they might dump it somewhere else. They might dump it into supplies classically or office expense classically. These are dumping grounds. If you have a supplies accounts that's this huge number compared to other similar businesses or other expense accounts. It's going to draw the attention possibly of an auditor on a tax return possibly a huge miscellaneous expense. A lot of people don't like using miscellaneous expense because it looks like you'd like if it becomes a big number it's going to be ugly. But again no matter where you put it it's going to look funny because you don't know where it goes. Now if you did know where it goes you if you had the receipts or something you can attach the receipts and possibly that can give you more information to actually identify it and provide you with an audit trail. And they have a mobile app that can help you with that as well. But like I say only some businesses would need to do that most businesses can pay electronically for what they need which would give you the audit trail. So that's what you'd like to do if you could. But if I confirm that now we have the same thing in that it's decreasing the checking account. So it's still going to be decreasing the checking account. I won't go into it we've seen it here but the other side now is on the income statement. So now the other side is on the income statement in the miscellaneous expense. So that's the difference whether it be on the income statement or the balance sheet. All right now let's imagine we have a situation where they paid their own rents they paid their own personal stuff out of the business checking account. Now this becomes difficult on the bookkeeper or it becomes difficult even if you do your own books. But it's particularly difficult on the bookkeeper because the bookkeeper doesn't know your your habits or who you typically pay. So so they might see a restaurant or like some what they have no ideas at a business or personal. So so that so that's why you want to separate it as much as possible especially if you have a bookkeeper. If you're doing your own books you can possibly identify it pretty well and then you have a couple different options on how you're going to handle. If you're if you're blending your books together note that which again a lot of bookkeepers don't like. But if you're doing your own books if you just have a small schedule see business then you might be able to use class tracking to break out the the profit and loss into into a category by class meaning personal versus business. We have a whole nother course or section on that if you want to get into more detail with that because you basically need the profit and loss to do the tax returns because the schedule see is basically an income statement. And then you'd have a basically a combined balance sheet for personal and business is the is the general idea and your checking account would be mingled together which again isn't ideal. But you can kind of get away with that if you're small if you're small business or you can use it just for business purposes. And if I spent money out of the business account I'm going to record it as draws. Now this is something you can do even if you don't have access to like class tracking for example because possibly you don't have as high a cost of the software maybe you don't have class tracking because of the software. So so I'm going to go and let's do the first way. I'm going to say this one was paid for personal. So who did you pay. We paid the rental company but it's not for business rent. This is for personal rent. So we're going to say OK. Now also note that if you work from home you might say well I have a home office expense that throws a whole nother wrench into the system because now your expenses could be partially allocated between work and business. And there's no perfect way to account for it because you can have to deal with that on the tax form. So we have a whole nother course or section on that if you want to look if you want to kind of get into those tax issues in more detail. So I won't dive into that here. So let's go into rental rental company and let's say this is so this is going to go into instead of rent it's going to go into draws. So that would be like as though they took the money out personally and then paid their rent. Right. But instead of taking it out personally they paid it out of the business account. I'm not going to create a rule for it. Let's say confirm and let's go to the balance sheet and run it. So so now we've got the checking account decreasing and the I won't check it because we've seen that the other side though is in the draws. So I forgot which month it's in. So the draws for the rental here it is two thousand four hundred for the rental if I go into it it's an expense form. So now we took a personal expense and we just recorded it to draws instead of recording it on the income statement because it wasn't a business expense. It was a personal expense by putting it on the books as draws over here. It would be kind of the same as though they took the money out in cash from the business to personal checking and then paid for it with the personal checking. But again you might say hey look I would like to have one QuickBooks file that can do both business and personal and give me a balance sheet for both and have one checking account. So so not always recommended but you can basically do that. How come so we can say on the income statement I would like to have an income statement with two categories business and personal and then and then so I can use the business income statement to make my schedule see. So if I did that I can go to the first tab and let's go into my cog up top and then go to the account and settings and then we can go to the advanced settings. We're getting advanced here and we're going to go down and say that we want under the categories selecting that and you have class tracking you have location tracking. There's also the use of tags. I won't we have whole another course or section on this but the class tracking is usually the one that's a bit more versatile. So I'm going to check the class tracking warn me when a track when a transaction isn't assigned a class. That might be something that you want to do because if you are going to break out your books between every transaction having a business or personal class then you would like to assign a class to each transaction. And the benefit of that is that everything that doesn't have a class will show up in its own column and you'll be able to assign a class to it. So again I won't go into that in detail. I'll show you what I mean here though. Let's save that and and say done and then I'm going to refresh the screen on my transactions so that hopefully it will refresh the capacity to use the class tracking within it. And then let's go down here and say the second rental. We're going to say that we have then our field over here of classes right. So I'm going to. So now it's going to go to the rental instead of going to owner's equity. I'm going to say plus and then I'm going to select the expense account. It's going to be an expense but it's a personal expense. So I'm going to go into do do do do they have rent or leasing rent. Let's call it rent expense personal. Now when you break out the personal stuff you could actually try to break out like a sub account for personal but I won't go into that in detail. Let's take a look at it. We're going to say boom and then this I'm going to make a class for it which is going to be P for personal. Now you probably would want a business class and a personal class so that you can assign each transaction to either business or personal and any transaction that doesn't have a class assigned will then show up in its own column. So that'll give you another check to see that you tracked everything and then you could create a rule for it will do rules later but I believe you can do the class tracking in the rules. So once you have this all set up then the rule can take into consideration the class tracking. Let's go ahead and confirm it. So now here on the balance sheet we're still have a decrease in the checking account and and the balance sheet is is unless you have an advanced QuickBooks you can't usually do the class tracking on the balance sheet. And even if you could it gets kind of messy on the balance sheet side of things usually the class tracking works well and best on the profit and lost me at the most capacity to do it there. If I run the profit and loss this is by month what I want to do instead is run the totals but run it by by the class tracking. By the way I refreshed the screen just so to make sure the class tracking appeared because I don't think it was there because it wasn't refreshed. So I ran the report but I had to refresh the whole screen. So then so then I'm going to say run it for classes. So now you can see I have two columns. This is my personal and this is not specified. So and then under the personal here's the transaction that went under the personal. So so what you would want to do is have every transaction assigned a class business and personal and then everything that's not assigned a class is something that you can go in and fix. So these transactions for example if I was using this method I would go down and drill down to each source document and assign a class. So if you wanted to do this like in the middle of the year you could still kind of do it if you started like in in June or you know whatever and you started saying hey I would like to start using this kind of system on the class tracking. You could go back and basically assign a class to all the transactions by drilling down on each transaction and then assigning a class once the classes are on. It's a little tedious but you could do it. And then and then this not specified field if I was to specify all these transactions to a class this whole column will disappear and you'll only have business versus personal. And then of course you can use the business one to hopefully do your schedule C business. So like I say this would only be something that you might think about doing if you're small business with a sole proprietorship you have to do a schedule C and you don't want to pay for multiple QuickBooks files. And you want to use the class tracking to have that allocation that could be a method. All right. Let's go back to the trial balance and see where we stand let's run it. And this is where we are. So if you're following along then great. Then then if your numbers tie out to these numbers that's good if not try changing the date range it's often a date issue and then you can drill down on the numbers to the source document and possibly change the date to the proper date so we everything matches up.