Stockholder transactions and related transactions of small business owner(s) between the owner and the business are very common in the day to day activities of every small business. This article will briefly explain these types of stockholder/business owner transactions and show you how to set up the chart of accounts for QuickBooks Online. The logic and general classification will be similar for QuickBooks Pro, Premier or just about any other accounting software program.
When the corporation or partnership is formed, the owner or owners invest money or assets into the business. This account is set up as an equity type, generally as common stock, in the chart of accounts. In return for their investment, the shareholders are issued shares of the company or in a partnership their investment is effectively a capital contribution. Upon the business receiving cash for the issuance of the stock common (or preferred stock), you would record the par value of the stock (# of shares issued times the par value) and record the excess of the par value over the amount received by your business as additional paid-in capital in the equity section. Generally, capital accounts are not reduced unless the shareholders sell their shares back to the company. Issuances of preferred stock are complex financial instruments and are outside the scope of this analysis.
Stockholders, owners or partners frequently borrow funds from their businesses on a temporary basis in the form of “temporary ” advances because of personal cash flow needs, with the expectation of payback in the short-term. Sometimes, in order to pay personal expenses using the profits earned in the business, the owner sets aside a determined amount “owner’s draw” and pays him/herself monthly or weekly draw. Short term loans and advances are recorded as current assets in the chart of accounts, when there is a cash outflow.
A draw is often the payment of wages or commission before it has been earned. When earned the draw is repaid it often becomes wages or commission expense. To record an owner’s draw, set up in the chart of accounts as a current asset account with name or initials of the owner. The advantage of maintaining the owner draws in a separate account is that it makes it easier to see much money you or your partners or co-shareholders have taken out your business. Generally, the owner’s draw account will increase.
Loans to the business
When the business is having short term cash flow problems and needs to pay its expenses using the owners’ money, the owner frequently transfers the amount needed into the business as an “owner’s investment” or if its temporary, the owner makes a short- term advance. The short term advance is set up as a current liability when there is a cash inflow(as contrasted to cash outflow as described above for stockholder advances) from the business owner.
If a shareholder lends cash to his/her business and the advance is not temporary or is not given additional shares in the business in return for the cash, then the business owes the shareholder the amount which has been loaned. This is recorded as a shareholder or stockholder or partner loan. To record a loan, set up a liability account (if there are several shareholders, you could set up one for each of them) with the name or initials of the shareholder and, within QuickBooks the account type is called “Other Current Liability”. This illustration assumes a loan that is expected to be repaid in less than 12 months. Otherwise, the loan would be called a long-term loan and not set up as a current liability. It would be set up as a long-term loan.
Dividends are a method by which profits are distributed to its shareholders (owners). Dividends are set up as an equity type account called “Dividends”. If Dividends are declared at one time but paid after they are declared you need to first set up a dividends payable account “Dividends Payable” in the chart of accounts, as a current liability. When you pay the dividend you reduce the liability account.
A stockholder may agree to purchase a specified number of shares of stock and pay for the stock at future date. Such agreements, are called as stock subscriptions, and normally are recorded by debiting subscriptions receivable and crediting either stock subscribed or common (or preferred) stock issued and additional paid-in capital in the equity section. The account type in QuickBooks is equity. Stock subscriptions may be formal or informal, and stock may be issued in advance of collection of the proceeds from the issuance of the stock. And remember, this amount is a receivable,that is owed to the business and is recorded as such, in the equity accounts. You may see that the amount is negative, and that is correct because it’s an asset, the stock subscription, is therefore shown as a contra account in the equity section of the balance sheet.
This article is intended to make you aware of certain topics in QuickBooks Online that may be of interest to you when maintaining your QuickBooks Online. However, there is no assurance that the information is comprehensive in its coverage or is suitable in dealing with an your particular situation. Accordingly, the information provided should not be relied upon as a substitute for independent analysis and research. No accounting, tax, legal or other professional advice for private or public entities is being rendered nor is there any responsibility to update the information. There is no warranty that the material in the in this article is accurate or completely free of errors. You should take steps to verify these statements before relying on them.