S-Corp equity accounts help

KAOS · ‎April 13, 2019

Hello,

I am the sole shareholder of an s-corp, QB was set up as a single member LLC and i had a lot of things not set up properly, after months of help from you guys getting things straightened out I went to a CPA and had him file my 1120s. I had him correct some things in Quickbooks but I am a little confused on a couple things and would like a better understanding of my equity accounts so I know what to put where if need be.

I had owners equity account mostly money that I had put into to business

I also had Retained Earnings, Opening Balance Equity and Owners Draw accounts.

Near as I can tell this is what the Accountant did...

-He Created a Common Stock Equity account

-He renamed owners draw to shareholder distributions

-He made a journal entry to zero out owners equity and it appears in common stock as part of a split with the building, land and furniture and equipment.(not sure if I said this right)

-The amount in common stock is the total from assets-liabilities...

What I am trying to do is simplify my chart of accounts and understand equity accounts better, I have read many posts and articles as well as watched hours of youtube videos and everything i see and read seems do be different or they use different names which is where im getting confused.

some say common stock some say capital stock(im guessing these are the same thing)

one guy says make a shareholders capial account and put distributions and contributions as sub accounts, some say you need 3 accounts some say 4 some 5 or even 7...smh... I would like as few as possible

So this is what I have done so far

-I made opening balance equity account inactive as I never used it

-I added shareholder contribution account and moved everything from the previous owners equity account to it as it was mostly money i put into the business

-I renamed Owners Equity to Shareholders capital and made distributions and contributions sub accounts

So I now have 5 equity accounts which looks like this

Common Stock

Retained Earnings

Shareholder Capital

-Shareholder Contributions

-Shareholder Distributions

is shareholder capital the same as common stock ? can i just delete it and put dist. and contrib. sub accounts of common stock or keep it this way or or delete shareholder capital and not have sub accounts ? One video i watched said close distributions and contributions out to retained earnings and leave common stock alone, the accountant will do all this at the end of the year but I would like to understand better what is being done... also there is a lot of mention of additional paid in capital, is this the same as shareholder contributions ?

And last as an example if my building in my asset account had a value of say 150,000 and my loan for the building was from a family member rather than a bank and said loan was in mortgage loan payable account with a balance of say 120,000 and the family member as part of an early inheritance said I only need to pay back 50,000 how would I account for this, does it go in owner contribution and out of mortgage loan payable ? and does it increase my common stock ?

Thank you for any help

QBsguru · ‎April 15, 2019

Lets just start with the equity accounts. The current set-up with the 5 accounts appears to be correct.

1) Common stock never changes unless you issue and purchase additional stock

2) Retained earnings are prior years accumulated earnings and losses

3) Shareholder capital is the account that everything will roll into

4) Shareholder contributions is money contributed in the current year

5) Shareholder distributions is money taken out of the business in the current year

On January 1 before you make any transactions you look at the balances of accounts 2, 4 and 5. You zero these out into account 3. You start the year with only common stock and shareholder capital.

View solution in original post

Malcolm Ziman · ‎April 15, 2019

Given that the net income passes through to the shareholder, you don't want to show any accumulating Retained Earnings. So I would create a journal entry dated 12/31 to move the Net Income for the year debit Retained Earnings, credit Equity (if a profit), but only after the tax return is filed and the Net Income agrees to the schedule reconciling book to tax profit in the tax return. Then close the books. The balance sheet will still show a Net Income for each year, as it is a calculation, but each year should be offset by the same amount in Retained Earnings, so it is not accumulating

View solution in original post

QBsguru · ‎April 15, 2019

Lets just start with the equity accounts. The current set-up with the 5 accounts appears to be correct.

1) Common stock never changes unless you issue and purchase additional stock

2) Retained earnings are prior years accumulated earnings and losses

3) Shareholder capital is the account that everything will roll into

4) Shareholder contributions is money contributed in the current year

5) Shareholder distributions is money taken out of the business in the current year

On January 1 before you make any transactions you look at the balances of accounts 2, 4 and 5. You zero these out into account 3. You start the year with only common stock and shareholder capital.

KAOS · ‎April 15, 2019

Ok thank you but that last part confuses me to as almost everything I read on s corps says to not close retained earnings out to anything as the example below that i got off of upcouncel.com, I think my problem is I have read to much and watched to many videos and there is a lot of conflicting answers, I suppose it probably comes down to preference as i all gets put on the tax form the same way. The way you said makes much more sense to me as retained earnings gets reported for only the current year on the 1120s.

If your S Corp has significant retained earnings, then the S Corp could lose its status. Keep in mind that the previous year’s closing balance in the retained earnings account is used as the opening balance the following year. In order to calculate the new retained earnings, you will take that opening balance and then do the following:

Add net income.
Subtract net loss.
Subtract the portion of the income distributed to shareholders to identify the closing balance for the retained earnings account.

Malcolm Ziman · ‎April 15, 2019

Shareholder Distributions for an S Corp is a tricky question. You have to pay an owner operator of an S Corp a reasonable salary, with payroll taxes properly treated, before any distributions.

KAOS · ‎April 15, 2019

Up to date I have only paid myself a salary, I have not yet taken any distributions and my CPA did not close out retained earnings at the first of the year, there is still a balance in there so now im thinking I should close it out....

Malcolm Ziman · ‎April 15, 2019

Given that the net income passes through to the shareholder, you don't want to show any accumulating Retained Earnings. So I would create a journal entry dated 12/31 to move the Net Income for the year debit Retained Earnings, credit Equity (if a profit), but only after the tax return is filed and the Net Income agrees to the schedule reconciling book to tax profit in the tax return. Then close the books. The balance sheet will still show a Net Income for each year, as it is a calculation, but each year should be offset by the same amount in Retained Earnings, so it is not accumulating

KAOS · ‎April 15, 2019

Thank you, I will do that.... Do you have any suggestions as to how the loan part should be handled ?

QBsguru · ‎April 16, 2019

You really need to check with your tax accountant on the loan. Technically, on the books you would reduce the amount of the debt and credit an income account called "forgiveness of debt" which is taxable income.

You might be better off paying back the loan in full and having the relative gift you that amount. You will likely have to receive payments over several years since there is a limit to a non-taxable gift given for both the giver and the receiver. That is why I would suggest you confer with your tax accountant before finalizing the transaction.

KAOS · ‎April 17, 2019

Ok thank you, I will let the accountant deal with it....

Wonderer · ‎May 28, 2020

What if the retained earnings is negative in an S corp? how do you post a journal entry to clear the retained earnings account so it doesn't carry over?

Sara08 · ‎February 12, 2021

Hello,

Does QuickBooks zero these accounts out when you close the books at the end of the year automatically or do you have to physically do this process?

katherinejoyceO · ‎February 12, 2021

Thanks for asking your first question in this thread, @Sara08.

As an insight, QuickBooks will zero out your Income and Expense accounts automatically, then add your fiscal year's net income to Retained Earnings. This will make you start your new fiscal year with zero net income.

For more information, you can read through this article to learn about the process of closing your books in QuickBooks Desktop.

For future reference, read through these articles if you need to make changes to the closing date and password, or how to prevent changes to past books in QBDT:

Let me know if you have additional questions. We're always delighted to assist you some more.

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S-Corp equity accounts help