When an entrepreneur begins her business, the initial money used to start the company can be considered an owner contribution. It is an equity account. For example if she starts with £32,500, the owner contribution account is credited for £32,500. If that £32,500 is deposited into the business bank account, the bank account is debited £32,500. On a balance sheet, a debit is on the left and a credit is on the right. Using the QuickBooks General Journal Entries will reinforce that. A debit reflects "what you got." In this example, you got £32,500 in cash to open your business. A credit reflects "where it came from," in this example, it came from the Owner's Contribution account. Each debit is balanced by a credit, and QuickBooks will not allow an unbalanced General Journal entry.
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Create an equity account in QuickBooks called Owner's Draws. Open the "Chart of Accounts," located in the "List" menu on the top icon bar. Hit the "CTRL" and "N" buttons to create the new equity account. Click "OK" when you are done. Make a clear distinction between wages or salaries paid to the business owner and the owner's draws. A draw is simply a payment made to the owner out of the initial investment in the business. As such, an owner's draw is not taxable wages. Issue a paycheck and a draw check instead of attempting to pay both items on one check. A business using owner's draws is likely a sole proprietorship and would use a Schedule C attached to the business owner's personal tax return.
Doing this will keep all draws off of the owner's W-2 at the end of the year, though all salary and wage information will be on there if you have the QuickBooks Payroll services that provides all tax forms.
Make a payroll check using the "Pay Employees" icon on QuickBooks' home screen and make it out only for salary or wages for the owner. Many companies use owner's draws to reduce the amount of money the owner or owners pay in payroll taxes. For example, an owner earning £19,500 annually from the business who invested £65,000 initially has the option of taking £9,750 in wages and £9,750 in draws. This can save the owner £1,491 in self-employment taxes each year. He can continue to do so until the initial investment is depleted, which in this example would be almost 7 years. If you are using the QuickBooks payroll services, reduce the salary or wages in the "Edit Employee" screen before creating the paycheck.
Write a check from the Owner's Draw account. Go to the "Banking" menu located at the top menu bar at the top of the Home page. Click on the "Write Checks" tab and make the owner the payee. Enter "Owner's Draw" into the account column on the check detail to apply the amount used from that equity account. All draws will be treated as nontaxable withdrawals of cash assets from the business.
Use either the QuickBooks check register, the business credit card account in QuickBooks or petty cash to pay business-related expenses. A small business owner must avoid the co-mingling of funds. If your business uses any accounts to pay personal expenses, this is called co-mingling funds and can lead to all sorts of tax complications. If your personal bank account is low, use the Owner's Draw account to write yourself a check from the business and deposit that check into the personal account. Always pay personal expenses out of your personal account. Once a business starts using business accounts to pay personal expenses there is a risk of an extensive audit. These amounts should be completely omitted from the income amounts filed on the Schedule C. If you sign up for the QuickBooks Electronic Banking Services, it will allow you to transfer funds from your business account into your personal account electronically.
Check the QuickBooks chart of accounts on a daily basis. Monitor the Owner's Draws versus the Owner's Contributions accounts regularly. Make sure that if you are writing checks from the draw account that there are contributions to cover those draws. The IRS knows you cannot draw out more than you contributed and will look more closely if the use of the draw account is abused. In QuickBooks this information is located about half way down the Chart of Accounts list in the Equity accounts.
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