Forums: Discussions for entrepreneurs and small business.

we are an llc with 3 members.  Do we make journal entries at end of year to clear out retained earnings and if so, to what accounts do you disperse retained earnings to?

We have been in business since Jan of 2009 and I don't believe that partner draws and retained earnings have ever been cleared at end of year by bookkeeper.

HELP?

Assuming that you haven’t elected to have the LLC taxed as a corporation, the year end closing entry can be made as a single large entry or in a two step approach. I’ll detail the latter below.

Close out each of the revenue and expense accounts for the year to an accumulated earnings account. After that is done, the amount in the accumulated earnings account (net profit or net loss for the year) is then closed out to the three partner capital accounts in proportion of the partners’ interest. If the net profit for the year was $200,000 and two partners have a 40% interest each and the third had 20%, then the partners with the 40% interest would be allocated $80,000 each and the third partner would get $40,000 allocated to their account from this accumulated earnings account. After the entries are made, the amounts in each of the revenue, expense and accumulat3ed earnings account should be zero.

The partner draws would normally go against each partner’s respective account for the amount(s) of the actual cash (or value of other property) transferred to each partner.

If you would like to discuss off-line, feel free to contact me.

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga