Owner’s Equity / Retained Earnings, Beginning Balances, Accounting, and Lizzy…

Owner’s Equity / Retained Earnings, Beginning Balances, Accounting, and Lizzy…

Owner’s Equity / Retained Earnings, Beginning Balances, Accounting, and Lizzy…

One of the confusing things with Lizzy is when you are told to make adjustments to your Owner’s Equity/Retained Earnings account.  And it will never fail to throw your accountant into a tizzy.  So let me explain what we mean, and why we mean, to help smooth things over with your accountant.  Also, for the rest of this article, I will be referring to Owner’s Equity and Retained Earnings as OE/RE, which is the same thing, depending on your ownership.  Corporations use Retained Earnings, Business Owners/Partners use Owner’s Equity – but its the same thing.  Its simply the business ‘Ownership’ accounts – in a corporation which is owned by Stockholders, the Equity accounts show Stock and Retained Earnings values of ownership, while in a sole proprietorship or partnership, the Equity accounts show the Share of Ownership, what has been contributed by the Owners, what has withdrawn by the owners, and what profit/loss has been distributed to the owners.  But it is all the same thing with different names.

But I digress…

When you are told to adjust Equity, you are being told to do that for 1 reason, and 1 reason only.  To enter/adjust your starting figures into Lizzy.  We understand that the vast majority of our clients are coming from another system to Lizzy.  Lizzy understands this as well, and as part of her functionality, has 2 items to note for inventory.  Both are in Settings > General > Company Info.  The first is “Date We Started Using Lizzy”.  This is your ‘Go Live’ date, and the date Lizzy uses for her internal adjustments.  The other is the “Initial Inventory is Complete” check box.  While this check box is unchecked, any inventory adjustments you make Lizzy assumes to be part of the inventory loading process, and adjust for the day prior to your “Go Live” date.  Once your final inventory adjustments are done, you check the Complete check box, and then Lizzy makes inventory adjustments for the day you do them.

However, this causes an oddity to your Profit / Loss Statement, and that is that Inventory Shrinkage all of a sudden has hundreds of thousands of dollars ( or more ) as balances, which of course is wrong.  Those figures need to be adjusted.  And at the same time, so do all of your other figures from your Balance Sheet, and Profit / Loss system up through your Live date.  How do these beginning numbers get into the system?  Through GL Adjustments offsetting ‘Equity’.  I’ll now pause for the exclamatory screams from all of the CPAs.

But wait, and think for just a moment.  What is Owner’s Equity/Retained Earnings account for?  It is fluctuation of all of your Business Activity for a given year.  Well, what are you doing?  You are making the biggest fluctuation you ever make by changing your business system to Lizzy.  So, in a way, it makes sense to adjust your OE/RE account as we enter our values.

But the other aspect is that because you are using a business system, you have to make adjustments separately to get values into the system.  Lizzy prevents you from adjusting her protected accounts ( Inventory, Receivables, Payables, Checking, etc ) directly from the General Ledger, as by doing so would create an imbalance between the GL and each specific subledger.  As an example, Lizzy tracks Inventory by each and every part that you tell her about.  So, if your GL says you have $100000 in item inventory, Lizzy doesn’t see $100000 as a single value, she see’s it as thousands of parts with varying values that sum up to $100000.  But, if you make a GL Adjustment to Inventory, how is Lizzy supposed to account for it.  She still see’s the same thousands of parts the sum up to $100000.  The same holds true for all of her protected accounts.  That’s why she won’t let you adjust these accounts in the GL.  You need to tell her specifically what parts are no longer there, otherwise she has to assume they are still there and have value, because, to her, she can prove they are still there being counted.

So, to enter the initial values on these accounts, you need to do so separately from the GL Adjustment form.  So, for your Accounts Payables, you go enter Expense POs offsetting OE/RE.  For checking, you enter a beginning balance, offsetting OE/RE.  Same with receivables, you enter each customers balance, offsetting OE/RE.  Inventory, because inventory adjustments are a regular part of business activity, offset Inventory Shrinkage.  So you’ll need to adjust Inventory Shrinkage into OE/RE.

However, once all of your protected accounts are entered this way, you have all of your other assets, liabilities, and equity balances you need to enter, plus the income, costs, and expense accounts since the beginning of your fiscal year.  I always suggest when doing so you do each section separately, to make it simpler to track any mistakes that could be made.  So you’d enter all your Other Current Assets as a GL Adjustment, offsetting OE/RE.  Then your fixed assets, and so on and so forth.  Naturally, you would date everything for the day before your Go Live date.  When you get to your P&L items, I always suggest breaking those down by month ( so if you started Lizzy on May 15th, as an example, I would enter my P&L items by month.  So I would enter Jan Income, offsetting OE/RE.  Then Jan Costs, then Jan Expenses.  These I would date for the last day of the month ( Jan 31, Feb 28/29, Mar 31, etc ).  By doing these this way, I can run P&Ls for the month for these months, and use them for comparisons for next year and future years.  Then, when I got to May, I would do the same thing for May 1-14, and date it the 14th.

Once you’ve done all that, and if you did it correctly, your Trial Balance/Balance Sheet from your old system should match Lizzy as of the day before your Go Live Date.  INCLUDING your OE/RE account.

Now – there will be occasions where this doesn’t balance.  This is because those protected accounts don’t match up.  Meaning your Trial Balance in your old system will be $110K, but Lizzy says $100K ( because those are the parts you told her about ).  Now at this point, either there are $10K worth of parts missing that didn’t get entered, or your old system’s Balance Sheet was wrong ( which I find more and more to be the case, simply because of how your old system tracked parts, or allowed you to make adjustments to these accounts that weren’t really right ).  To fix the protected accounts, you basically make a non-protected account similar  to the other accounts for conversion adjustments.  So, for our example, I would create an Asset account named “Lizzy Conversion Adjustments” and put my missing 10K in there, offsetting it to OE/RE ( which should also be short 10K ).  Point being, if your Balance Sheet/Trial Balance balances in your old system, you should eventually be able to get it to balance in Lizzy for your Go Live date, based on these adjustments.

And that is what we mean by adjusting your OE/RE accounts.

( For the record – at no other time, and for no other reason – do we recommend making manual adjustments to OE/RE. )