Journal Entry for Distribution to Owner

Owner distribution is the allocation of the company retained earnings to the owners.

Distribution to the owner is one of the ways that company can allocate the retained earnings to the owner. It mostly happens in small and private companies.

During the business lifetime, the company generates profit and accumulated them in the retained earnings under equity section. It is the net profit that has settled with all expenses. At the end of accounting period, the income statement needs to be reset to zero. All revenue and expense will be moved to balance sheet. They move in form of the net income or loss.

Net income will increase the retaining balance account on the balance sheet. Net loss will reduce the retained earnings balance.

If the company keeps making a profit, the retained earnings will keep increasing. It shows the result of the company from the beginning to the reporting date.

The company owner may decide to distribute the profit to the owner. It is the process that transfers the profit to the owners for their own personal use. It happens to the small business and the owner controls the business.

The process of distribution to the owner will decrease the company equity and assets.

Journal Entry for Distribution to Owner

The company accumulated profit will include in the accumulated retained earnings on balance sheet. When the company process the distribution to the owner, they will reduce the company cash balance as it is made in form of cash. And it will reduce the company retained earnings.

The journal entry is debiting retained earning and credit cash.

The journal entry reduces the cash balance which needs to distribute to the owners. It also decreases the retained earnings

Example

Mr. John is the owner of company ABC. After several years of operation, company has accumulated retained earnings of $ 500,000. During the month, company distributed cash at bank $ 100,000 to Mr. John. Please prepare a journal entry for distribution to owner.

It is the transaction that distributes the company retained earnings to the owner. It will reduce the retained earnings and cash balance.

The journal entry is debiting retained earnings $ 100,000 and credit cash at bank $ 100,000.

The journal entry will reduce the retained earnings by $ 100,000. The cash balance $ 100,000 will move to the owner as well.