Equity is the book value of a business. Above all equity is what the business is worth at a given moment in time. So when we talk about Equity in QuickBooks Online, we’re talking about running the balance sheet and setting up that bottom section properly in the chart of accounts.
When you’re through here, make sure you check out the next post on Contributions in QuickBooks Online.
The simple formula for Equity in QuickBooks Online (or anywhere) is the following:
- Beginning Balance
- Plus / (Minus) Net Income
- Plus Contributions
- Minus Distributions
- Equals Ending Balance
Depending on the type of company or entity (Corp, LLC, Partnership, Sole Proprietor…) and who owns it, the Equity in QuickBooks Online can take on many forms.
The entity type really just drives the nomenclature in the Equity Section.
Corporation = Shareholder
LLC = Member
Partnership = Partner
And yes, LLC can file as a corp or a partnership. Question is, do you want to build your chart of accounts based on how you file, or how you want to report the financial information about your company? There are many reasons for running a set of books that go well beyond just filing a tax return.
Investors, lenders, and of course you as the owner will need to be able to read these financial statements and understand what they say about the financial position of your company. As a result, when you set up
Equity in QuickBooks Online this will explain to them who owns the company and how much they’ve got invested in it.
Getting a tax return filed should be incidental. Making important decisions about how to grow the company should be paramount to all other things when deciding how to structure your Equity in QuickBooks Online.
At some point, probably as part of on boarding your accountant should be asking you what kind of company you have. And you should know. The very next question should be aimed at who all of the owners, shareholders, members, or partners are.
This is necessary to set up the Equity in QuickBooks Online section properly. Each owner has to get their own section.
Equity in QuickBooks Online might look something like this:
- Seth David Capital
- Equity / Capital
- Retained Earnings
- Net Income
I will get into contributions and distributions in two separate follow up videos and articles. The equity sub-account is where that owner’s share of net income should be distributed each year.
The retained earnings should be zero after you distribute net income to the individual owner capital accounts. This is only necessary if you have two or more owners in the business.
Net Income is a temporary account. The current year to date net income posts to the balance sheet to… well.. Balance it 🙂
Watch the video above to see what Equity in QuickBooks Online looks like.