I have inherited books that have not been properly maintained. The owners equity has been building for years. I would like to close his withdrawals from the company, but want to make sure I remember correctly.
Should I take the withdrawals from past years which are categorized under members equity and make an adjusting entry directly to retain earnings and do that same for any profit? This entry is making sense to me but also looms doubt. The taxes are all blending by a diff personal and so I am just trying to keep as clean a set of books as possible. Any comments please. This is not a homework assignment but a real question. Thank you

Yeah, generally owners' withdrawals are closed out against retained earnings at least annually.

It's sloppy accounting, but not uncommon, to see those closings get overlooked, and so the Draw account bloats up over a few years with the accumulated build-up of several years' draws. In such a case I don't see any harm in cleaning it out with a single JE against retained earnings.

It has no net effect on overall equity, of course. Just be prepared to possibly answer a banker's phone call when he asks about a sudden large change in the accounts that make up Equity.

But stay tuned; there are some accounting whizzes on here who might want to modify my answer for a technical accounting reason that I'm overlooking. (Well, OK, not overlooking... more like completely unaware of.)

Net profit similarly should be closed out to retained earnings at least annually.

I agree with ArcSine. The only thing I would have to add is what date to do that. Have you closed out 2009 yet? If not and you can still get into January, one good thing to do would be to take everything through 2008 and adjust it to the beginning balance of retained earnings in 2009. That is actually the proper way to adjust prior year stuff -- except it was never really meant to be used for this purpose. But still, seems like a sound way to do it. (There isn't any "good" way cause it's messed up, but yeah, small company books can be that way. I've had the fun of cleaning up messes more often than I'd care to discuss.)

If you can't do that, can you do it at the end of 2009? The idea there is simply to get it cleaned up so it's not on 2010 stuff. If 2009 is unaccessible, then do like I suggested and adjust everything through 09 to the beginning retained earnings in 2010.

What is behind that method is that what you're doing isn't actually affecting the current year's books. You're adjusting it at the beginning of the year and starting with a proper retained earnings balance.

Now how that will pan out in software I'm not sure - depends on what you're using. Software's a wonderful thing, but sometimes prevents us from doing something the way we'd really like to do it.

Yeah, some place like the bank might wonder. However, if it's never been done before, seems someone would have asked about it prior to this, which is leading me to believe no one who cares has been looking at it. Banks know what they're looking at.

As for taxes -- got to wonder what got reported for that, but don't know if that's going to be your problem.

Not sure how to send you each a thank you direct so:
Thank you arcsince and
Thank you morgaine300
I feel much doing what I thought I should.

Always a pleasure to help, my friend.

You're welcome. :-)