In this presentation, we will compare the pros and cons of our two methods for tracking a personal tax deductions on our business QuickBooks account. Remember, our objective is to have our business and specific personal items be tracked in one QuickBooks file, there's going to be two methods we will use to do that, we've been looking at a equity draws method, and the uses of the classes method within QuickBooks. There are pros and cons to each method. As we've seen after we've put these methods together, we'll go through a few of them now and then take a look at the QuickBooks file and show these methods and what those pros and cons may be. So we can get a better idea and understanding of when we would like to apply either of these methods, what circumstances would be best or which method we just prefer. So here we have the equity drawls method does not require adjustments to profit and loss.

So the equity draw method doesn't affect the profit loss for the business at all. We're not using classes, and therefore we don't need to make any adjustments to the profit and loss. And that's typically what we provide at the end of the year for tax preparation preparation for the business side. So that makes it nice and easy and separates things clearly from the profit and loss side of things. it properly allocates, draws and equity accounts, we are going to categorize draws. So the concept of draws gets more confusing, but they're all just draws.

And that's the proper categorization for anything that's a personal item, whether it be something we have to track for business for tax purposes or not. And the draws method properly does that. The problems are that draws accounts do not close automatically. So QuickBooks doesn't do the closing process as they do with the profit and loss which closes out to the equity section. The draws just keep going on forever, like other permanent type accounts, and that could cause some problems when we go from year to year. It's not really an issue.

And we'll we'll take a look at that when we see the financials. But we do have to be mindful of it when we processed the reports at the end of the year, so we know what the draws reports are saying. So that we just include, in essence, one time period worth of data into the draws account and not try to count two years, because the fact that it doesn't close out or we can do a closing process for it, make the balance sheet account more complicated. We're going to add draws accounts to the balance sheet account. So now that the equity section is going to look for what used to have 123 items in it, now it's going to have all these drawls accounts in it. And that adds a level of complexity to the balance sheet to the permanent side of the reports.

So that's going to be a bit of a drawback on the equity method, the classes method, where we utilize the classes to get to a similar objective a similar goal similar result, reports deductions as expenses as expense accounts, which is a more intuitive concept, meaning when we're tracking, even if they're personal items, we're tracking them because they're going to be deductible typically in our thought process for these items, at least deductible on the tax return. And we think of those kind of expenses and deductions, most people think of those things is intuitively the same or similar in nature. And therefore, it makes more sense to most people to record these items as a kind of expense. Rather than recording them as draws. Most people see them as a deduction like a kind of an expense. And that's what we'll do with this method, we will record them as a type of expense and then just change the class that there'll be recorded into permits as to group items in the same account as business or personal.

So we can then have one account that we can then we could have items within that account that we could assign to the business side or to the personal side, which is some nice flexibility. So there might be an account we set up that we have some business and some personal and in that situation We can use classes to break up the payments that we made to that one account, we can't really do that with the draws. Because if it's in the draws account, it is what it is in the draws account. It's not, we can't assign some of it to a different Expense Type account. So we'd have to do something a bit different to make those those changes. And we have balance sheet has less accounts and only one that draws account.

So from the balance sheet perspective, in terms of just simplicity, in terms of how many accounts are on the balance sheet, we don't have this list of draws on the balance sheet, these categorizing of draws. So just the look of the balance sheet will be easier. The downsides are it takes some time to allocate each transaction to a class, we've got a set of classes, and then we got to assign at least these items to a class which is another step when doing the data entry and or assign all transactions to a class. And that could take a little bit longer for the data entry. Profit and Loss reports takes more formatting to generate, it's possible for us to generate basically the same profit and loss that we would have. Under the business side of things using classes.

If we had if we In other words, if we didn't report any of these personal items into QuickBooks, we can get to the same profit and loss for business items. But we need to be more careful in doing that. And it takes a few more steps for us to format the profit loss report in order to eliminate these expenses that are not business related from it. When we want to just see the business Profit and Loss reports. Balance Sheet will show net income for business and personal that can be confusing to understand. In other words, because we're going to record these items on the profit loss report, the net income, QuickBooks often shows on the balance sheet, which isn't really proper for financial accounting, and it can confuse people because the balance when we when we look at the balance sheet report It's going to be allocating.

In other words, the net income, whether it be personal or business related to a net income line, which ultimately is going to go into equity. And it really properly should be going into draws. Now, it doesn't really matter so much if we're talking about a sole proprietor, because at the end of the day, they all close out to the same place. But that can be a little bit confusing. So let's take a look at these QuickBooks files. And we'll go over these in the QuickBooks file, we're first taking a look at the classes method.

So this is the one where we utilized classes. And let's take a look at the financial statements. If we go down to the reports, and we go down to the company and the profit and loss reports, then this is the standard Profit and Loss report. And I can make this as of Oh 10119 to 1230 119. That's the year that we worked on. And the confusing thing about this, of course, is that the itemized deductions, the ones the personal items are getting out here.

And we've grouped them, they're, they're nice and at the bottom, they're kind of out of a way. And we can still see in this format, net income from ordinary operations and even group them out of the way in that format. But if we want to print this, these can still be a bit of a burden to see that. And it takes a little bit more formatting. To get rid of these if we want to just see a normal profit and loss to remove these, then we got to go to we could do so by going to customize reports and then go into filtering. And then we go to the classes that we're going to filter by, and then we're going to we're going to want to just see the business classes.

And okay. And that's one way that we can see just the the profit loss so you can see it takes a little bit more time for us to do that. But we could still get to the profit and loss when we see those the items in the report. Without that I'm going to go to Customize reports and filters. classes and remove the selected filter to go back to where we were, we can see that these items are what we can prepare and give to the tax preparers at the end of the year. And notice that they're given as Expense Type items, meaning they're accumulating over this time period only.

And that's pretty nice. So that we can just give this report and they sum up these items nicely. We can also just double click on these items, and it'll give us another report a more detailed report that we can easily print out and everything looks good, the totals look good, and we can print this out and provide it for the added detail to do tax preparation for whatever needs we have. So those are the pros and cons there. Note that as we enter the data, we did have to put in more information and we had to set up the classes. And when we went into the banking and use register every transaction we put into place we had to Add a class to by putting a split or at least the new ones and adding a class here.

So that's gonna be that's, you know, one of the cons here is that we gotta, we gotta have to add a little bit more information to the transactions as we enter this into place. It's also important that we note when we do these transactions, that we do the reports by class, so we make sure that they're in the proper class. So if we go to reports, drop down, company and financial, and take a look at profit and loss by class. And change the date range there from a 10119 to 1230 119. That's January through December 2019. We can see that we're going to have the classes here we've got the business, the non taxable personal and notice the unclassified.

We have this item here, that's not classified, and we could want to apply that to a class. So anything that we don't apply to the class, we can easily fix, but we need to go into this report. Make sure that we've properly classified everything to fix it. Of course, we could just easily go in here, double click on it and assign it to the proper class, I believe this one's business. And that should be it and Save and Close. And that should give us our, our amount to the to the proper class that we're looking to apply it to.

We also need to do that for the sales items. We didn't do that on the bank statement. So I'm just going to go back in here and say, okay, we need to apply this to the proper class business. And we'll say Save and Close. And this one, we're going to apply to business. Say save and close, and one more applied to business.

And save and close. So we can see that and then once the unclassified goes away, we could say okay, now they've been properly allocated to the proper classes and everything. Looks good. But we need to basically do that when we ran the profit loss report. Without doing that, you'll know that the profit loss was not exactly correct because it's not. Those unpack classified amounts wouldn't be there when we grouped it by class possibly.

So we need to go to this report and just make sure that everything winds up. Also, if we go to the reports up top, and we go to company and financial and take a look at the balance sheet standard. And we change the dates from 1230 119. We can see that includes the net income amount down here, that's 58. And that's going to be net income for both the business and the personal. So we got to be be aware of that.

The net income is going to roll over into the owner's equity. So if it's a sole proprietor, all these things are basically related, so that they're all the owner's equity. Therefore, it's it should all go to the same place and not be a big deal. However, note that the net income should properly be reported as draws, rather than as net income. Again, the draws are still going to roll over into to owner's equity or they should. And it's not it's not an issue, but it's something that we need to just be aware of the different groupings in the equity section under this method.

And under the equity method, we've now jumped over to the equity method. And we'll compare and contrast that reports here. If we go to the profit and loss and we go to company and financial profit and loss and change the date range once again from Oh 10119 to 1230 119. We can see that the income statement doesn't have we don't have to do anything to it. And the net income is here on the on the balance on the business numbers. We don't have any personal information on the income statement because we didn't use any income statement accounts as compared to If we go back to the equity method, remember we had these items that we recorded as expenses, and we separated them by class.

So under the equity method, we don't have that problem. And and the income statement when when we want to see business income income statement is what it is. So that's one of the benefits of the equity method. If we go to the balance sheet, because the reports drop down, if we go to company and financial, and we take a look at the balance sheet, and change the date to 1230 119. Then we have the same information here we should and then we've got the draws accounts down here. And this is where the things get messy on the equity method side of things because the draws instead of just having one account now, this is where we're grouping out the information to multiple different accounts.

So this is where things get a little bit more messy in bed. We have to have these groups if we only have a few groups to break out. It's not too bad. But the more groups we have to break out, the more than these drawers accounts are going to have a long list of drawers accounts on the balance sheet and complicate the look of the balance sheet. we've grouped in organize these so that they can sum up and we can kind of minimize them to see them in just one line item as as basically draws rather than multiple line items, which is nice. So if you have one different factor, then maybe that if you have a lot of different things you're trying to track on the personal side, then the draws method may not be as useful because you're gonna you're gonna have a lot of information on the balance sheet, whereas you might want to use those temporary accounts on the income statement.

The other drawback remember is that the draws doesn't typically roll over automatically. You'll note that net income here now shows what is from the business side of the profit loss and it's more proper this this method instead the draws and the Net income are now broken out in a more proper method, you'll at least the draws in total. But note that this net income again, it'll go away. And these are just temporary accounts. If I change the date up here, to 2020 to the next year, this net income is going to roll into the owner's equity. So I'm going to select this item.

And then you'll see it when I just you'll see it went away, the net income went away because it got included in the owner's equity. So in other words, these are temporary accounts of the sole proprietor that, you know, if they're categorized a bit differently, they should all go to the same place, as long as they're giving us the information we need. As we track as we track this information, I'm going to go back to the 2019. The other thing we need to be aware of when tracking in this format is that these accounts don't close out to equity. So if we were running in year two or your three, they're always just going to keep on going up. They're not going to close out, start over at zero again as the end Income Statement accounts do.

So we can either close them out manually ourselves, we can do a closing entry, or we don't have to do that, we can just note that they're just going to keep going up forever. But when we provided the information to our tax preparer, we want to make sure that we double click on them and provide the report the activity from January of 10119 to December and tell them hey, this is the activity, don't worry about the balance column. Just worry about what happened this year, the total that happened this year, that's how much did we pay for state and local taxes. And so just got to be aware of that they're not going to close out in the same way that the temporary accounts will which will only give one year's worth of data. Also note that this method, we need to be a bit more mindful as we enter the data into the system.

So to show that just remember if I go to the banking up top and use register and go to the checking account, when we entered this into the system when we had a new item that we need to put in, such as the college tuition We had to set up this draws account. And when we set it up, we had to set it up as an equity account. And that's not the default, the default will be to go to an expense account. So we have to do a bit more work and be a bit more mindful when we enter this data, the first time to make sure that we set up the the accounts properly, and then the next time we entered, it'll go there automatically, and we shouldn't have an issue with it. But the first time we enter these new items, for personal related items, we have to not do the default not making an expense type categorized account, but an equity account.

In other words, if we go to the lists up top, and we go to the chart of accounts, we'll note that all these draws accounts we set up as equity type accounts, as opposed to as we did under the The other method, or the classes method. We set them up as expense accounts, expense accounts with the default. And so when we enter the the new accounts in there, we got to make sure that we change the default to the equity accounts. So those are just a few of the other The pros and cons between the two methods you'll note, they in essence, get us to the same place if we take a look at the balance sheet, and we'll we'll get to the same place at the end of the day. There's there are pros and cons to the two methods. So it really comes down to what the needs of the individual company is, what the company industry is and what the preferences are for the entering of the data for both the owners and the bookkeepers as they enter the data to the system.