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Are personal distributions a business expense?


I received an email today with a common question about shareholder distributions:



Bob -

Currently on our books, personal distributions are listed as "owners equity". This doesn't seem correct to me. Most distributions are as simple as a company CC being used for personal purposes. Also - these Distributions are not showing up on the P/L report - (probably because of how they are being catagorized). Could you please help me know if there should be a change in how distributions appear on our books?



Here is my response:



They are showing up correctly on your books. Here are some basics:



1) A distribution to an owner is not an expense of the company, so it should not show up on the P&L.

2) Because distributions aren't on the P&L, they do not reduce the net profit of the company.

3) A distribution is a benefit to the owner, and therefore is an equity item.

4) When an owner invests in a company or the company earns a profit, the owner's equity increases.

5) When an owner takes money out of a company or the company has a loss, the owner's equity decreases.

6) Personal expenses paid by the company are considered a distribution.



As always, the best thing to do is to keep personal expenses off the business books.

 



 


 


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