Why Closing Out Equity Each Year Matters for Small Businesses & S-Corps

Have you ever looked at your balance sheet and noticed an owner draw number that is way bigger than anything you took out this year? That usually means your books were never closed out at the end of the year. I’m Jen McAllister, CPA and owner of Rise CPA & Accountants, and in this video, I walk through why closing out equity accounts matters and exactly how to do it! Key Takeaways: 📌 Owner Draws & Distributions: Money you take out of the business for yourself. 📌 Owner Contributions: Personal money you put into the business from your own pocket. 📌 Net Income vs. Retained Earnings: Net income is your current year's profit (earnings minus expenses) that starts over at zero every year. Retained earnings is your all-time cumulative total profit minus everything you have taken out. 📌 Retained Earnings ≠ Cash: The retained earnings label tracks an accounting total, not actual cash sitting in your bank account. 📌 Why Closing Out Equity Matters: It lets you see your current year's activity clearly, lines up your business tax return and S-Corp basis tracking, helps catch bookkeeping errors right away, and keeps your balance sheet clean for bankers, lenders, and potential buyers. 📌 Automated vs. Manual Closing: Software like QuickBooks automatically shifts last year's net income to retained earnings on January 1st, but resetting your owner draws and contributions requires manual adjustments by you or your accountant. Want a free PDF with the outlined steps on how to do this? 📲 Connect with Us: Website: https://riseaccountingllc.com/ Schedule a Consultation: https://riseaccountingllc.com/contact Give us a call: (385) 318-3800 Disclaimer: This video provides general educational information and should not be taken as specific tax or accounting advice for your specific situation.