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.

This page explains the process for accountants and bookkeepers who are Xero partners to account for distributions to stakeholders using the default report templates in Partner Edition for the specific type of entity. If you don’t have access to report templates, you can customise the Profit and Loss and Balance Sheet reports in your client’s organisation instead.

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 partnership to walk you through the process. However, you can easily adapt it for the distribution of income in a trust or company.

You want to attribute your current year earnings to 2 stakeholders, Mary and Peter.

  1. 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

      Image showing adding an account called 'Distribution to Beneficiary'

    • Equity accounts for the share of profits for both Mary and Peter

      Image showing adding an account called 'Share of Profit - Mary'

  2. Map report codes to your client’s chart of accounts as follows:

    • The account for the distribution of income to the Distribution to beneficiary/partner report code

      Image showing mapping the distribution of income account to the Distribution to Beneficiaries EXP.DIS report code

    • Each of the share of profit accounts to the profit distribution report code for the respective beneficiary

      Image showing mapping the share of profit account for Mary to the Beneficiary shareholder advance accounts LIA.NCL.ADV.1 report code

  3. On your Partnership Annual Accounts report template, make sure:

    • The Distribution to Beneficiary/Partner group is visible, and that it’s named the way you want it
    • The template is saved as ready for use
  4. 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 equity accounts for their share of profits

    Image showing creation of a Manual Journal for distribution of earnings

When you run the Profit and Loss and Balance Sheet reports for the period, you will see that the current year's earnings have been attributed to the beneficiaries.

Image of Profit and Loss report Distribution to Beneficiary under Non-operating Expenses