I operate a sole proprietorship.
As a result of this, when I withdraw funds from my business, those funds are an owner’s draw: they are not wages.
If I look at my business records, in a month when I made enough money to ‘pay myself’ but not enough to actually accumulate a surplus of value in the business, it looks like I had no profit.
When I do my internal accounting to figure out if I ‘got ahead’ each month, I make a column called ‘Gains’ that consists of my owner’s draw and my business’ net income.
Is there a generally accepted name for what I’m calling ‘Gains’ ?
net profit less owner’s withdrawal is your plowback to capital (under retained earnings.)
note: withdrawals in one year is not necessarily a percentage of net income for that year. it is heavily influenced by one’s actual cash flow. the business’ sources of cash that should not be witdrawn by the owner/principal are proceeds from loans and advances, customer’s advances/deposits, and other liabilities.
the OP as stated is net income for a period plus withrawals, which still implies a subtraction (adding a negative) and is threfore a net amount which goes to your capital. “getting ahead” is simply growth of your capital from earnings. i might not fully understand your question though.
Your owner’s draw is simply another term for Distributions or Dividends. On an income statement, that should come after Net Income. Therefore, Net Income plus Distributions is a meaningless number as you would be adding back something that hadn’t been subtracted yet. Net Income less Distributions is a meaningful concept as it is the portion of Net Income you are keeping in the business and results in an increase to Net Worth or Equity. A basic look at an Income Statement is as follows.
Revenues
Cost of Goods Solds
= Gross Profit
Operating Expenses
General & Administrative Expenses
= Operating Proft
Other Expenses (Income)
Taxes
= Net Profit
After Net Profit, you have items like Distributions, Capital Contributions, Other Comprehensive Income, etc.
Your question is sort of like asking what is the term for Gross Profit plus General & Administrative Expenses: it doesn’t make sense since that is a meaningless concept.
Mr. Slant, it sounds to me like Owner’s Draw is currently set up as an expense account. Is that correct?
If so, that explains why there is this confusion. When I set up a chart of accounts, Draws are always an equity-type account. Thus, net income is calculated without the Draws. Draws appear on the Balance Sheet (Owner’s Equity - Draws + Net Income = Total Equity). Done correctly, there is a final closing entry at the end of the year that zeroes out Draws and reduces Owner’s Equity. Thus, no special term like “gains” or “plowback” is needed - the change in Owner’s Equity is the dollar figure you’re trying to calculate and name. (Some people and software programs call this Retained Earnings instead. Accountants sometimes get into debates about whether it is proper to talk about Retained Earnings outside of a corporate structure; many prefer Owner’s Equity for a sole proprietor.)
Some business owners are confused by the use of equity accounts and the balance sheet because they want to see Draws as an expense. This is really not the correct way to do it. However, for those who insist, QuickBooks (and most other accounting packages) has a type of account for “Other Expenses” and that’s the compromise I’ll recommend. That way, you can see an Ordinary Net Income that excludes the owner’s draws, even if the total Net Income does include them.
Looks like you nailed this one on the head.
Am considering putting in a new account for draws, then re-coding every single one of my old ‘owners draw’ transactions to that.
Thanks a ton!
As a SP all income of the business is your wages, minus expenses. All profits are your pay at least for tax purposes. If you want to isolate the companies money and make yourself an expense you would need to incorporate. That way you can accumulate funds in the biz that do not impact your personal tax burden.
Just wanted to add some flavor to this. In the USA, it’s very difficult to legally accumulate money in a business without it being someone’s tax burden at some point. Most entities are pass-through (actually, I’m not aware of any entity that a small businessman could form that doesn’t result in passing profits/losses through to the owner/shareholders).
Some entities elect to be treated as S Corps which can allow avoidance of social security taxes for some distributions but is a vehicle with quite a few rules around it (most generously contributed by the IRS as they basically define this treatment). It’s more complicated than that, but that’s the cocktail napkin version.