Account for the distribution of income to stakeholders
Some entity types need to account for the share of earnings between multiple stakeholders, such as beneficiaries in trusts or partners in a partnership.
Xero locks the Current Year Earnings system account. This means that you can't directly 'clear it out' at year end to account for any distributions to stakeholders.
Instead, you can create an expense account in Xero and post journals from this account to the relevant stakeholder share of profit accounts. This shows the distribution of income on the Profit and Loss and Balance Sheet reports.
In this example, we’ll be using a trust to walk you through the process. However, you can easily adapt it for the distribution of income in a partnership or company.
You want to attribute your current year earnings to 2 stakeholders, Mary and Peter.
If they're not already set up, add accounts to your chart of accounts for the following:
An expense account for the distribution of income
Non-current liability accounts for the share of profits for both Mary and Peter
The account for the distribution of income to the Distribution to Beneficiary/Partner report code
Each of the share of profit accounts to the profit distribution report code for the respective beneficiary
In your client organisation, create and post a manual journal to transfer the current year earnings to the beneficiaries' accounts as follows:
- Narration - describe the reason for the journal
- Date - usually the last day of the financial year
- First line - the full amount of the distribution coded to the expense account for the distribution of income
- Next two lines - amount distributed to each beneficiary coded to the related non-current liability accounts for their share of profits
When you run the Trading Income Statement and Balance Sheet reports for the period, you will see that the current year's earnings have been attributed to the beneficiaries.