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I have an LLC with 3 members, and have created an equity account for each member.

I have a transaction that debits the checking account and credits the equity account for each member's contribution made to capitalize the company.

What is the "proper" way in GnuCash to adjust each member's capital account for the past year's profit/loss.

One side of the transaction would be the equity account, but I'm not sure what the other side would be.

I am also looking for the best way to do this with GnuCash in mind, as I have read that "closing" the books should not be necessary.

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In general the accounting equation is Assets - Liabilities = Equity. So by changing one side (in your case your partners have added Assets) you automatically change the other (Equity). You don't want to transfer money out of your checking account here because you're not changing the amount of that asset.

Rather, what you can do is transfer money from your Equity:Opening Balances account into each shareholder equity account (e.g. Equity:Shareholder1, Equity:Shareholder2 & Equity:Shareholder3). In this case you're not changing the Assets (and thus unbalancing your Checking account) and the accounting equation still balances.

If you need to track which expenses are attributable to a particular shareholder, you can create sub accounts in your checking account for the same purpose instead. In this case, the shareholders equity would decrease by the expense outlays (which is probably not what you want).

Edit based on comment:

If you want to update the equity based on profit and loss for the year, you can perform a zero-sum entry in your Equity:Opening Balances and allocate the profit or loss to the individual partners. The screenshots below assume a 25%/37.5%/37.5% share amongst partners and a profit of $20K for the year.

enter image description here

And then in your Equity:Opening Balances account:

enter image description here

The main point is that you can't change the total amount of equity without changing your Assets or Liabilities (which contain the total profit/loss for the year) - hence the zero sum split.

Final Note:

Distributions to partners can be made directly out of their equity accounts. For example, if you write a check, then the entry in Assets:Checking would transfer from Equity:Joe Moneypants and his equity account would automatically reflect his decrease in equity due to the distribution.

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    What I'm missing, is how to adjust the equity accounts for profit/loss at the end of an accounting period. Also, we haven't made any distributions yet, but how would those be accounted for? – Corey Jan 12 '17 at 20:14
  • @Corey See edits above. – Andy Jan 12 '17 at 21:06
  • Thank you so much for your patience with me. How would I know what each partners total equity is? – Corey Jan 13 '17 at 13:57
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    It comes down to the agreement between you and the partner. Say Joe Moneypants invests $100k for 20% equity: You take his $100k, put it in your checking and begin using it to grow the company. He now owns 20% of the company. So use a GNUCash->Reports->Assets&Liabilities->Balance Sheet report on 12/31/2016 to get your total equity on that date then allocate 20% to Moneypants via the above described techniques. Note this is his instantaneous equity only on that day. You'll want to rebalance prior to making a disbursement as his equity will have changed since the 12/31/2016 'statement'. – Andy Jan 13 '17 at 17:41
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    Note that everything here comes down to the agreement between you and your partner: Are disbursements allowed or is the partner only allowed to completely cash out? If the former will disbursements decrease the partners equity percentage or can they just be borrowed? This all plays into how the allocations are made (if they are made) and the affect it has on your accounting. I don't know what's common in business here. – Andy Jan 13 '17 at 17:54

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