From time to time, I find new clients have a hard time understanding how to account for equity contributions- particularly when that means purchases from their personal bank account. When someone is starting a new business, they often incur business expenses before they are up and running with a business bank account. This can cause some confusion when setting up a QuickBooks file if the business owner has set up a separate business bank account as recommended.
Suppose a business owner buys a piece of equipment required to start-up their business for $5,000 from their personal bank account. The problem is they also want to account for the $5,000 fixed asset and/or any expenditures, but they do not want to incorporate their personal bank account in their QuickBooks file. The short answer is to open up the Equity account that is often called “Owner’s Draw” for an LLC (go to Home>Accounts>Owner’s Draw). Enter the transaction for the item (making sure to label it as a fixed asset if it is equipment that you will need to depreciate) and enter the amount under the increase column. That’s all! QuickBooks will recognize the expense (or the fixed asset) and acknowledge that you contributed that money to the business from your personal funds.
For a more detailed explanation and tip:
I recommend that people set up a separate Equity account for Owner’s Contributions and Owner’s Draw rather than having one account that does both. This makes it easier to account for how much you contributed to the business and how much you have taken out. To add the account, simply to go to Home>Accounts>Click Control+N. This way anything you contribute to the business goes under contributions and any money you take out for person use falls under Owner’s Draw.
If you’re curious why it all works this way, you have to learn a bit about the difference between balance sheet accounts and your income statement. Balance sheet accounts include any account that is an Asset, Equity, or Liability and gives a snapshot of your business from the beginning of time to present day (in reality, the balance sheet is often less helpful for one person businesses and is not required for tax purposes, but makes more sense and is required for tax purposes once you have two members in your LLC or business). Your income statement will include all Income and Expense accounts and gives you straight up what you earned and spent in a particular period. Assume you spent $50 on an incorporation fee from your personal account. Recording the transaction as explained above would account for the $50 as an expense in your income statement and a contribution of $50 into the business. Nothing is affected within your business’ bank account and the expense is properly accounted for in your income statement.