Saving QuickBooks clients from themselves: Set up Draw as an Other Expense
By Leslie Shiner, MBA, Advanced Certified QuickBooks ProAdvisor and Enterprise Certified QuickBooks ProAdvisor
Do you work with a Sole Proprietor or S-Corp? Has your client ever been confused by having to pay taxes on a large profit, when there is no money in the bank?
Sometimes we have to help save clients from themselves.
One thing I do with my small business clients is that I reformat their P&L for their own management purposes, not for GAAP purposes. I create an Other Expense account called Draw or Distribution. I also create more Other Expense accounts for things like Estimated Tax Payments, Personal Loans, etc.
Now, before I get angry emails saying that this is “bad accounting,” I understand that this is not GAAP. I always tell my clients that their CPA or tax preparer will tell them this is not the right way to do things.
And I always tell them that we must move these dollars to their correct location on the Equity Section of their Balance Sheet before the end of the year.
But the value of this change is that when the client prints a P&L, they can see what their net profit is and how much money they’ve pulled out of the company. I teach them that the Net Ordinary Income will represent their taxable profit. And the Net Income shows them how much is left after they’ve pulled money out of that profit. And if the Net Income is negative, their draws have exceeded their taxable profits.
That helps answer the question that I hear so often:
“If Uncle Sam says I made all this money, where is it?”
About the author:
Leslie Shiner, MBA, Advanced Certified QuickBooks ProAdvisor and Enterprise Certified QuickBooks ProAdvisor, is well-known as an author, speaker, and trainer. She has more than twenty years of experience working as a financial and management consultant for the construction industry. As the owner and principal of The ShinerGroup, she helps both small and large construction companies better understand their business practices and maximize their profits.