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Simplify equity accounting for sole traders / proprietors

Many small businesses are owned by a single person, often called a sole trader or sole proprietor. But Manager’s default account structure accommodates other, more intricate business organizations. So it may encourage more complexity in the chart of accounts than necessary.

Every new business created in Manager automatically includes a Retained earnings account, essentially the net of all inflows and outflows, adjusted for various transfers, dividends, etc., since creation of the business. In many cases, the Capital Accounts tab is also enabled, where members (owners of capital accounts) are designated, investment contributions and draws are recorded, and so forth. Frequently, journal entries transfer amounts between Retained earnings and various subaccounts of Capital accounts. And both Retained earnings and Capital accounts are included under the Equity heading on the Balance Sheet. But for the sole proprietor, things can often be simpler.

As sole owner of the business, a proprietor owns the Retained earnings account. So no real reason for separate capital accounting exists. Retained earnings can be renamed as Owner’s equity, eliminating the need for other equity accounts. Benefits include fewer tabs enabled in Manager and reduction of equity transfers with journal entries. Unnecessary reports disappear from the Reports tab. Any transactions that might have involved Capital accounts can instead be allocated directly to Owner’s equity, bypassing needless steps.

Eligibility for simple equity accounting

You must satisfy two requirements to use this simple equity accounting:

  1. You must be the sole owner of the business, with no partners or shareholders involved.

  2. You must personally be entitled to all profits and liable for all debts of the business. (Loans are permissible, but outside investors with capital interests are not.)

Setting up simple equity accounting

Rename Retained earnings under Settings Chart of Accounts:

Click Edit to the left of the Retained earnings account name:

Rename the account as Owner’s equity. Add an account code if desired. Click Update when finished.

Your chart of accounts will now show the new name, with the original, default name below in gray, revealing the automatic origin of the account.

Your Balance Sheet will show a very straightforward equity account structure:

In essence, Owner’s equity shows how much value you have invested in your business at a given moment, taking into account all forms of assets and liabilities, including unbilled time and expenses, cash and equivalents, fixed assets, loans, accounts payable and receivable, and so forth.

Note
One characteristic of this simple equity structure is absence of a drawing account revealing how much you have drawn from the business since the previous accounting period closed. (Drawing accounts are normally zeroed out at the end of each period, requiring more transactions.) A drawing account is unnecessary because the information is more readily available in Manager in the Statement of Changes in Equity report. Follow three simple steps:

  1. Post all draws to Retained earnings.
  2. Enter the description Draw for withdrawal line items.
  3. Create a Statement of Changes in Equity report in the Reports tab covering the full account period.

The sum of your draws to date during the accounting period will appear as a single total in the report. Current information will always be just a few clicks away.

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