Hey, rockstar.
This is probably one of my favorite topics other than payroll, of course.
The closing equity and the entries and all the things
that have to do
with closing out the books.
I used to think this
was very overwhelming,
but it’s actually a very simplified process.
It’s more of the understanding of how
these all works and kind
of really absorbing it.
So I really hope you’re taking notes because you
are going to need this
when you’re closing out your client’s books at the end
of the year or whenever it is.
So be prepared,
grab your notebook,
grab your favorite pen,
and let’s go-ahead
and get started.
In the next couple of videos,
we’re going to be talking
about closing the equity accounts out.
And there’s a couple of concepts that we need
to understand before we do those closing entries.
And there could be a couple of different situations where
that would change how we make those closing entries.
So let’s just go to the Craig’s Design
and Landscaping Services real quick,
which is the sample company that we’ve been using
in the past couple of lessons.
I’m gonna go ahead and click
on Reports down here.
And what I’m gonna do
is I’m actually going
to pull up the Balance Sheet real quick.
And we’re actually gonna leave,
whatever date is on here,
hit Run Report for just in case.
So what we wanna do,
is we actually wanna scroll down to
where we call our Equity section right here.
So you’ll see that we have
this Equity section.
So remember if..
.
If you remember from the previous lessons
that I had created
some Owner Contributions for Craig,
and also some Owner Distributions for Craig.
So let’s click on that.
So we have our Owner Contribution for the $24,000.
So you’ll see here we have $22,500 for the truck contribution
that Craig had contributed,
and also that $1,500 cash that he had contributed to the company as well.
Let’s go back
to the Report Summary.
Then we could come down here
where it says Owner Distribution.
You notice that it’s a negative account
because we essentially took money out of the bank
to give it to Craig.
So if we click on that,
we’ll see that we have a $20,000 distribution for the truck that we gave back to Craig.
Then also a thousand dollars of a check
that we wrote to Craig,
so he can go pull that money from the bank
or do whatever he pleased.
So let’s go back
to the report summary.
Then you’ll notice
that we also have the opening balance equity.
Remember we teach you so often in the luxury landscapes
and throughout all these lessons
that you shouldn’t have any opening balance equity here.
This is a sample company.
So that’s why there
are entries there,
but I’m just giving you a heads up.
Then you’re gonna notice down here
that we do have a net income
of $142.46 cents.
This net income number is actually automatically pulled in
from the the income statement inside of QuickBooks online.
So instead of you having to hop over to the
income statement and see what your net income
is after we have all of our
incomes minus our expense and that net
income amount actually comes
into our Balance Sheet for us so that way we don’t have to go looking
into the report.
So that net income is actually coming from your income statement.
Then you’re gonna notice that we have
this random account called the Retained Earnings
that actually doesn’t have any
information at all right there.
Here’s the important thing to really cover
when it comes to Retained Earnings.
So what QuickBooks online does
is it actually rolls over all of the accumulated earnings
from the previous years
into Retained Earnings for you.
So you don’t have to actually do that yourself.
And when we do
these closing entries,
QuickBooks online is automatically going to close everything
to the Retained Earnings.
So I’m just gonna go ahead
and change the date up top here.
And what we’re gonna do
is we’re actually going to change it to end on,
we do 01/01 of..
.
Let’s actually do 0/01/2021,
01/01/..
.
This is the following year.
So if we do Run the Report,
keep you come down, you’re here,
you see that as soon as I changed it
to the next year,
the first day of the next year,
you’ll notice that we now have nothing
in our net income and
how it actually rolled over our net
income for us.
I didn’t have
to enter any journal entries, no information.
Instead QuickBooks online did the dirty work for me
and actually rolled the retained earnings
into our roll,
the net income into retained earnings
on our behalf.
So that amount is the $142.46 cents.
So let’s talk about the reasons
of why it did this.
Well every year you wanna be able
to see what our net income is for that year only.
You don’t wanna see what you made last year.
You wanna see what your net income
is for the current year that you’re working in.
So this is essentially why QuickBooks online does
that for us.
And it’s actually pretty genius of them to make
that entry for us
on our behalf.
And so what it does
is every year we close the net income out
to the retained earnings so
that we can see,
what we are earning this year.
And essentially this retained earnings will show us what our previous year was.
So this retained earnings just really helps us to kind
of visualize what we previously had earned,
what our net income
was for the previous year.
So you’ll see that the net income here
is actually zero.
There’s nothing here.
And the reason why is because there’s no entries
in for 2021,
’cause that’s the date I chose for the sample company.
So that’s why there is no net
income at all here.
The net income could be either a positive
or a negative account.
So also keep that part in mind.
It depends on if the company is in a loss
or they profited.
So now what we wanna be able to do
is we actually want
to close out.
We’ve not only closed out that net income
into retained earnings,
but we also wanna close out this Owner distribution
into the capital account.
Which the capital account in this case
is the owner contribution right over here.
So that’s essentially what we wanna do.
We wanna not only have the net income roll over
into the Retained Earnings,
but we wanna close this Owner Distribution
into the Owner Contribution.
So another thing that we might you need to do
as well is close
this Retain Earnings account,
or the net income from the previous year out
to a capital account.
And technically speaking,
that would be closed out
to the capital account if there was multiple partners,
then that retained earnings would be split
between the partners,
maybe depending on the percentage of the cut they have
in the company.
So now we can get way deeper into that issue,
but just know that what is very common is
to just let the accounts close
to the retained earnings if there’s only one partner.
If there’s a sole owner,
then most counts,
we’ll just leave it
in retained earnings.
And every subsequent account knows exactly what that is.
And again, it’s all equity.
It’s not affecting the equity account
when we close it
to the capital account,
all it’s doing is increasing
this capital account here.
So when we close out this owner distribution
of the $21,000 to the owner contribution,
it’s going to offset that.
So that’s essentially what’s going
to be happening there.
So for example,
if I were to close out this retained earnings
into the owner contribution,
it would increase this
to $24,148.46 cents.
So you can easily see it doesn’t affect the equity itself.
This is just a technicality of how we close these out.
It becomes important when there’s multiple partners,
but when there’s only one partner or one sole owner,
it’s very common to see it exactly
as it looks here,
except for the opening balance equity,
which we don’t actually tell you and encourage you to use.
This is a sample company.
So we can’t really get rid of
this opening balance equity.
So just understand that the proper accounting for the equity section,
that technical accounting would you be to close
this retained earning to the capital account,
which is the owner contribution.
And then to close the distributions
to the capital account.
And so it would just be
this capital account remaining,
and it would just continue
to roll over period after period.
And that’s how the closing entries work.
Now, if this were a C-Corp,
it wouldn’t have these owner contributions
or owner distributions.
What it would have is it might say
something like common stock
and then it would have any dividends paid out
and then would it also have this retained earnings as well.
And those dividends would be a negative reduction of equity.
It’s like the distributions,
it’s the same as distribution.
And other than closing that
to common stock,
we would close those dividends
to the retained earnings.
So there’s just
some little differences there,
but at the end
of the day,
the equity remains the same.
This is the equity.
What we’re looking at right now is a total equity.
It will not be changed by any
of the closing entries.
This total equity number
of the 1001..
.
I’m sorry,
$6,195.4.
That number will not change.
It’s just a way that we need
to close out all these accounts to reflect and have
these numbers kind of reset itself.
So remember, in this case here,
you want the net income to roll over
to the retained earnings.
Then you want the retained earnings.
I’m sorry.
You want the owner’s distribution to then roll over
into the owner contribution.
And then that way the owner distributions starts off
with a clean slate.
And so does the net
income every single year.
So that’s just a brief overview.
And actually the next lesson,
we are gonna do a closing entry together.
So you can kind of see what
that closing equity actually looks like.
I hope you’re taking notes.
This is a lot to kind of absorb,
but just really understand that whether it’s a
sole owner or a partner,
there may be different ways that we have
to handle it,
but don’t worry.
We’re here for you.
And I cannot wait to cover an Actual Closing Entry
in the next video.