Distribution Journal Entry is to record the payment of a portion of earnings to the Members or Partners of the Entity (Partnership or LLC).
Have you ever seen the Statement of Equity in a Partnership or LLC Financial Statements?
The primary activity in that statement will be Contributions, Distributions and Net increase or decrease due to HLBV adjustment, if any. So, this distribution transaction is a part of the Equity activity.
Table of contents
- Why does there’s a need for Distribution?
- Types of Distribution
- Distribution Journal Entry
- Frequently Asked Questions
Why does there’s a need for Distribution?
Distributions are paid to share the entity’s earnings to which the members contribute. However, Distribution can also be driven by the Membership Interest and Stock Purchase Agreement.
Types of Distribution
Distributions can be of two types
- Cash Distribution
- Non-Cash Distribution
We can understand the difference from the Name itself.
But why would there be a non-cash distribution?
Let’s explore this with an example.
Assume ABC, LLC into the dealership business for the sale of trucks. Contributions from its Parent entity XYZ primarily finance this entity.
XYZ, LLC is a transportation business. The Parent entity noted that the entity received a new order requiring additional vehicles. So, ABC Company supplied the additional vehicles to the parent entity instead of the distributions.
Let’s understand the accounting of distribution entries
Distribution Journal Entry
1) We need to identify the GL Accounts involved in this transaction.
- Retained Earnings
- Payable Distribution Account is a Liability account
- Bank Account
2) First step is to record the Distribution liability as below.
Retained Earnings A/c Dr
To Distribution Payable A/c
3) Second Step is to record the payment entry
Distribution Payable A/c Dr
To Bank A/c
4) The resulting entry is a debit to Retained Earnings and credit to the bank account. The reason for recording two entries is that payment need not happen on the same day it’s due. So, we need to record the transaction as and when due per the GAAP.
Frequently Asked Questions
What type of account is Distribution payable?
Distribution Payable is a Current Liability.
Is Distribution payable liability or equity?
Distribution Payable is a Liability account used for the accounting of equity transactions.
Is Distribution payable a credit or debit?
Distribution Payable will have a credit balance on recording the Liability. This credit offsets with debit during the payment of distributions to its members
What’s the difference between Contributions vs Distributions?
Contributions are the inflow of funds into the business from the entity’s members. These are nothing but providing capital for business operations. However, distributions are shared in the profits of the business. So, those are an outflow of funds from the business.
Distribution Journal entry is to record the payment of earnings to the members or partners of the entity. So, the transaction is recorded by debiting the retained earnings and crediting the cash. Just like an accounting of any other Journal entry, a thorough understanding is a prerequisite to recording a financial transaction.