S-corp initial setup

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@eseeacuity wrote:

 

 

I know OBE should be $0 when the file is set up correctly.  Where does the remaining $60,000 belong?  Can someone lay out all the equity accounts I should have in my chart of accounts?

 

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No, OBE very rarely zero after all opening balances are entered.  I wish that statement could be erased from the net, or at least modified with what you need to do.

OBE is total assets less total liabilities (equity is a business liability) - simple example

checking = 10K, and credit card = 10k
assets less liability would be zero

that is the ONLY time OBE will be zero, when assets = liabilities

once all starting entries are made, you use a journal entry to distribute OBE to the partner equity accounts

debit OBE

credit each partner equity for a portion of the amount

THEN OBE will be zero

This makes sense to me, and I'm relieved OBE does not have to be $0 after opening balances...that was very confusing to me.  I agree that we should go ahead and purge that from the internet.

However, part of what confused me was a post of yours from February:

Drawing from Retained Earnings of an S Corp

Here you mentioned partner equity accounts, but in that post you state there "are no owner equity accounts."  This could just be a terminology issue as you mention shareholder capital accounts in that post instead.

In short, it's clear to me now that I need an account (type: Equity) for each shareholder, and that those accounts will be credited with funds debited from OBE.  What's not quite clear is the proper name for those accounts.

Thank you very much for your help.

You avoid OBE, by doing your own real entries, and not "opening balance" generic entries. And it has to be Zero, at the end, or you forgot something. And it is never used again, once the file is set up.

This: "The S-corp has three owners"

You are not Owners. You are Shareholders, and might also work for the company = Employee-Shareholders.

"and tracks inventory.  We have two bank accounts and a credit card account.  My start date is 1/1/2019.

I have retained earnings from the previous year.  Let's say it's $10,000."

Yes, the ending info from the tax return and prior accounting would be used.

"I entered my initial bank account"

As Make Deposit, as "from Equity" as Retained Earnings.

"and credit card balances as of 12/31."

As "Credit Card Charge" and on the Expenses tab, you list Retained Earnings.

"Let's say these add up to $50,000."

They offset each other to a Net Equity. One is Asset and one is Debt balance.

"I also entered my on-hand inventory items.  Let's say these also add up to $10,000."

By making the item names. Then, using the most recent Physical count, make one Adjust Inventory and use it to populate Quantity and Basis (cost on hand) for each item by item name.

So far, there is no Reason to see OBE. That adjustment is "increasing Asset" and the top left is going to be Retained Earnings = represents equity you already own.

"Finally, I created capital stock and additional paid-in capital equity accounts for each partner.  Let's say these add up to $10,000."

Offset as what? You would basically have Equity unchanged, because these both are also Equity accounts. So, Retained Equity is simply part of Equity, too, and all of this is a slice-and-dice to various specific Equity Accounts.

"Here is what my Opening Balance Equity account looks like:

$50,000 (bank balances) + $10,000 (inventory) + $10,000 (retained earnings) - $10,000 (stock and paid-in capital) = $60,000."

It needs to be Zero. Allocate it.

"Where does the remaining $60,000 belong?  Can someone lay out all the equity accounts I should have in my chart of accounts?"

Perhaps one of the other entries had the Wrong offset. For instance, you seem to have Added banking to Credit Card; one is your Asset and one is your Liability.

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@eseeacuity wrote:

Here is what my Opening Balance Equity account looks like:

$50,000 (bank balances) + $10,000 (inventory) + $10,000 (retained earnings) - $10,000 (stock and paid-in capital) = $60,000.

 

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"bank account and credit card balances $50,000"   

credit card balance is a negative, so is this net?

If retained earnings is a profit, then it s/be deducted.  So that is 60 less 20 = 40. It must be zero. You are missing something

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@eseeacuity wrote:

 I'm relieved OBE does not have to be $0 after opening balances...

 

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OBE must be zero. If it is not zero, you made a mistake

Maybe this will help, as well: Equity is just Equity. It is "net Assets" or the difference between Assets and Liability. If I got hit by a truck, you sell all Assets (including collecting AR, a type of asset). You pay off my debt balances, Credit card, AP, etc. The left over = Equity.

So, your concepts for however many accounts you want to see as Equity is simply a Slice and Dice of Total Equity. That Value won't change, just because you decide you need to see some as Shares or each Shareholder; nothing here makes More Equity. You are distributing it and that would be done according to the Tax filings as your reference. And that explains why OBE should be Zero. that is "Equity I have no idea what it is offset from" which doesn't exist in real life. Everything is Known.

This is why I never make New Bank or Loan and also enter Opening Balance = I just pulled it out of thin air! Or, making inventory items and Also putting some on hand = I just found them in the gutter, and since this is inventory (something with a Value), that is Unknown Equity for you. That's why OBE is really better if you never use any of the functions that created it. You know the real entries to make.

I do understand equity (and you were correct of course that we are shareholders, not owners).  My struggle is mainly as a first time Quickbooks user.  It seems your suggestion is to completely forego the "opening balance" feature.  I used it because, in real life, my accounts did have balances on 12/31/18.

In fact, my struggle is on both ends.  In this case, it's properly getting money into my accounts, and once I get my file set up properly, my next question will involve properly getting money out by properly paying shareholder distributions.

I am going to back up my company and start from scratch using the methods you've outlined (deposits/inventory adjustments/etc).  Ultimately, if I remain unsure, I'll talk to a professional.

Thank you for your help.

This is a Programmer's Trap to you, the end user: "I used it because, in real life, my accounts did have balances on 12/31/18."

And you already had All the info available. But you used a function that never asked, for Each Entry, what the real Offset needed to be. You never have OBE; none of us has OBE. We all have Real Equity. Period.

"my next question will involve properly getting money out by properly paying shareholder distributions."

First is Payroll. Do you have a CPA to guide you on this?

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@eseeacuity wrote:

It seems your suggestion is to completely forego the "opening balance" feature. 

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I would not do that. The "opening balance equity" feature is the best way to enter opening balances in a new file for an existing business.  It's a clearing account to make sure you've entered everything properly.

If it's not zero when your'e done you've made a mistake 

Arguably, this is Not True: "The "opening balance equity" feature is the best way to enter opening balances in a new file for an existing business."

Read my comment, and Rustler knows this too, about Adding an inventory item (asset) and also putting some on hand at the time you add the item. You were never asked where the Offset should go.

Then, if you also need to enter AP, and you enter the vendor name and also the beginning balance as AP when that is where you should have listed the Inventory, you just made "uncategorized expense" ( for the Vendor name, when you pay it) and made Inventory Asset value out of Thin air = OBE.

Let me simplify this. Here is what I teach in the classrooom: If you and I are 50/50 partners, sure, we might want to make some Opening entries, such as Current Loan Balance. That hits OBE and we Zero it out later by Splitting it to our individual Equity accounts. Or, we can simply put everything into RE, as the Program would do anyway, and Split RE later, as we will do the first date of every new year, anyway. You gained Nothing but more work, to use "easy entry OBE, and I will try to remember to deal with it later."

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@qbteachmt wrote:

 

Adding an inventory item (asset) and also putting some on hand at the time you add the item. You were never asked where the Offset should go.

 

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The offset correctly goes to OBE so the best way to create opening inventory is to enter quantity and value in the new inventory item set up screen

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@qbteachmt wrote:

 

Then, if you also need to enter AP, and you enter the vendor name and also the beginning balance as AP ... you just made "uncategorized expense".

 

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Correct, the offset goes to "uncategorized expense" (bad programming), so I agree do not enter an opening balance in the new vendor set up screen.  Instead. create a service Item where the income account is mapped to OBE, and use that in Bills, either one Bill for each open bill or in total.

Use the same item in Invoices for the opening balance for Customers, as if you enter an opening balance in the new customer set up screen, it incorrectly goes to "uncategorized income"

I have a good handle on payroll, yes.  This is not our first year as an s-corp; we have been paying salaries using a full service payroll company for some time now.  This is just my first year in QB, which is why my questions mostly revolve around getting the initial company file (and its chart of accounts) set up properly.  Whenever possible, I prefer to do things the right way, because ultimately results reflect that...

Never do this: "so the best way to create opening inventory is to enter quantity and value in the new inventory item set up screen"

Example:

I set up the Widget item as a "typical cost" as $1. I have a Physical inventory and my transition trial balance with cost basis for each inventory item, and I see that Widgets on hand are 100 and the basis in them is $85 (average cost 85 cents each). That's because I often buy in bulk and get a price break.

If we do what you suggest, while setting up the item, I just created $100 of Asset out of thin air (OBE). That's already a 15% error in my accounting. Setting up Cost on the item is Notational, but it is used by that Opening Balance Function, because the programmers don't seem to care about what matters to you is your reality.

"Instead. create a service Item where the income account is mapped to OBE, and use that in Bills"

Why did you suggest OBE, when you just explained this will be a real entry and you know it is real equity? Why make something OBE, and Handle it again, later. You know OBE needs to be zero. So, I enter unpaid bills dated historically and the real expense account, such as Rent, knowing that if this is dated in the prior Fiscal Year, it is already rolling into RE; and for cash basis, when I pay the bill this new fiscal year, that is Rent Expense in the reporting. Or, for an Accrual Basis entity, that is already part of Equity by virtue of the bill being dated historically. Or, I simply need to enter the Uncashed Rent Check from last year, that is still uncleared in the bank, so that is entered as Retained earnings = last year's equity. You don't need OBE; you know the Real Offset and that is Real Equity.

The Programmers use OBE by making these "easy bake" functions. We don't need to Also use it ourselves, because we know it is Real Equity = RE.

The best reference for the chart of accounts is your 1120S. That's about all you need.

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@qbteachmt wrote:

 

I set up the Widget item as a "typical cost" as $1. I have a Physical inventory and my transition trial balance with cost basis for each inventory item, and I see that Widgets on hand are 100 and the basis in them is $85 (average cost 85 cents each). That's because I often buy in bulk and get a price break.

 

If we do what you suggest, while setting up the item, I just created $100 of Asset out of thin air (OBE). 

 

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No you don't understand.  You would enter the actual average cost, not the "typical cost", whatever that is.  Nothing is created out of thin air; $85 of a real asset is created

I suggest you take the QB Pro-Advisor training class, which I recently did,  so you can learn how to properly set up a new file for an existing business, using Opening Balance Equity.  It is nicely explained

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@Malcolm Ziman wrote:

"bank account and credit card balances $50,000"   

credit card balance is a negative, so is this net?

Yes, that was a net.

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@Malcolm Ziman wrote:

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@eseeacuity wrote:

 I'm relieved OBE does not have to be $0 after opening balances...

 

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OBE must be zero. If it is not zero, you made a mistake

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What you wrote is in direct contradiction with what Rustler wrote.  Laws of the universe say one of you is right!

I have Lots of Pro Advisor clients, because so much of what Intuit teaches and answers is Wrong. Thanks for the recommendation about taking their course, but no thanks.

"Laws of the universe say one of you is right!"

Of Course it should be zero. Let me explain this:

For the Accounting, there are Assets, Liability Equity. That's All there is. Everything else is a Slice and Dice. So, multiple equity accounts or One, is fine. But OBE is the QB Programmer's trap for "we didn't know what else to do with this.'

Either OBE was the Wrong thing to use, or you Zero it out later. And if you put it into OBE manually, you just made a Second handling of that data necessary, because OBE is supposed to be 0 once the file is set up and never used again. So, if you already know it is Equity, why not use the Specific Equity that it needs to end up at, and why use OBE as a Holding place, first, for Manual control?

Putting Customer Open Balances as AR opening balances, for a Cash Basis entity, means the Payments come in as Uncartegorized Income. Yet, that might have been Sales income + sales taxes; so, this clearly can make a mess of your data and results in you reporting as Income, funds that are not your income.

Putting Vendor Open Balances as AP, for a Cash Basis entity, means the Payments you make are gong to show as Uncategorized Expense. Yet, that might be a Loan Balance (principal and interest) or even against a Fixed Asset. So, that clearly makes a mess of your data.

For one of the files I manage that is a governmental entity and my other local governmental clients, "OBE" has to be shown as Equity, or if that is from us finding and making Missing data, Prior Year Equity. That's just a a Slice and Dice. Example: They never posted their Fixed Asset and all spending last year was entered as Expense. That means Expense is too high and Fixed Asset Basis is missing. Prior Year expense has rolled into Retained Earnings. To Remove it from Retained Earnings, we enter Debits to Fixed asset and Credit Prior Year Equity, to show Restatement. Then, on the first date of the next Fiscal Year, we Zero Out Prior Year to Retained Earnings, because we no longer need that Clarity, and it was already all part of Equity anyway, so nothing really changed for Equity.

It's like taking the stuff from two Closets and putting them into One; you still have the same amount of Closeted Stuff. You didn't actually change the Stuff you are keeping.

@Malcolm Ziman

Here's an example for you to consider. Setting up a file, let's do:

Loan account Opening Balance $15,000 (QB puts that offset as OBE)

Vehicle Fixed Asset Basis Cost Opening Balance $20,000 (QB puts that into OBE)

That means OBE is:

20,000 minus 15,000 = $5,000, and now you need to Move/Offset it.

Instead, you do it like this:

Make the accounts.

Make one entry:

Debit Fixed Asset $$20,000

Credit Loan $15,000

Credit Retained Earnings $5,000

Done.

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@qbteachmt wrote:

@Malcolm Ziman

 

Here's an example for you to consider. Setting up a file, let's do:

Loan account Opening Balance $15,000 (QB puts that offset as OBE)

Vehicle Fixed Asset Basis Cost Opening Balance $20,000 (QB puts that into OBE)

That means OBE is:

20,000 minus 15,000 = $5,000, and now you need to Move/Offset it.

 

Instead, you do it like this:

Make the accounts.

 

Make one entry:

Debit Fixed Asset $$20,000

Credit Loan $15,000

Credit Retained Earnings $5,000

 

Done.

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If you had done the Pro-Advisor training, you would have learnt that you only use Opening Balance Equity when there is AR, AP or Inventory.  In this example, there are neither of these so OBE is not required.

You would simply enter the closing Balance Sheet from the previous system as a Journal Entry as you did here. 

If there had been AR, AP or Inventory, then you enter all the other Balance Sheet account balances, including of course Retained Earnings (including last year's net income, assuming you start the new file on the first day of the new fiscal year), in a Journal Entry, with the balancing figure going to Opening Balance Equity.

Then you enter a) the quantity on hand and average cost for each inventory item in the new inventory item set up screen, b) each open bill using a service item where the income account is mapped to Opening Balance Equity (you do not enter a balance in the new vendor set up) and c) each open invoice using the service item used in (b)  (you do not enter a balance in the new customer set up)

This creates the Inventory, AP and AR balances (each should agree in total to the closing Balance Sheet from the previous system), with the offsets going to OBE, and the sum of these 3 accounts should agree to the balance in OBE, thus zeroing it out.

OMG, this is the Worst place to use OBE: "you would have learnt that you only use Opening Balance Equity when there is AR, AP or Inventory.  In this example, there are neither of these so OBE is not required."

I already described it. AP and AR isn't OBE. Example:

I already explained the problem for a Cash Basis entity, using Opening Balances. For AR, the actual payment is supposed to be Income and perhaps Sales Taxes; not Uncategorized Income. That's not Generic AR.

And Open AP might be for loans or even inventory, as I already noted.

For an Accrual Entity, last year's Sales income and Sales taxes on open AR can be entered Exactly as in reality and dated historically, because the Program rolls that into Equity for you. You just would not list inventory items as the sale, because part of your transition to this new file is a Physical inventory that already takes into consideration what got sold is no longer on hand.

Which means this is all extremely wrong:

"Then you enter a) the quantity on hand and average cost for each inventory item in the new inventory item set up screen"

Putting a Cost in any Edit Item is Notating it. You seem to want them to notate their current Carrying cost for purposes of OBE, then later, they would Edit all of these items to put the Cost they really wanted to notate this as. So, sure, Doubling their work, again.

"b) each open bill using a service item where the income account is mapped to Opening Balance Equity"

First, I think you meant Expense or Purchase Side of that two-sided item; on the One account link for something never also sold. And that would be Expense, and for a cash basis entity, last year's Open AP has not yet been reported. So, if that is supposed to be an expense, you just bypassed their P&L for either year; not in the prior year and not in the current year, either? How can this be only Equity? Because there is no JE to build open AP against Expense not paid, and even you just stated this part:

"(you do not enter a balance in the new vendor set up)"

Which means you never had this as expense at all. That is a pretty significant oversight.

"and c) each open invoice using the service item used in (b)  (you do not enter a balance in the new customer set up)"

Which just overlooked that some of the AR might be Sales Taxes, not Income.

See how all of that is Wrong?

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@qbteachmt wrote:

 

 

Which means this is all extremely wrong:

"Then you enter a) the quantity on hand and average cost for each inventory item in the new inventory item set up screen"

 

Putting a Cost in any Edit Item is Notating it. You seem to want them to notate their current Carrying cost for purposes of OBE, then later, they would Edit all of these items to put the Cost they really wanted to notate this as. So, sure, Doubling their work, again.

 

 

 

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It seems you really don't understand how this works.  Please do some research.

This is what I did: I entered a cost and quantity in the On Hand field in the set up screen for a new inventory item and an INV ADJ entry was created: it increases the inventory asset and increases OBE by cost X quantity, the cost being what I entered in the cost field.

Please test this in a sample co. and let me know what happens.

As I said before you put the actual average cost, not the "Cost they really wanted to notate".  In most, probably all cases there is no difference. Your example of the clearance purchase is rare, and who knows there will not be another clearance opportunity.  Actual average cost is the best amount to put down as the "Notating" cost

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@qbteachmt wrote:

 

 

 

"b) each open bill using a service item where the income account is mapped to Opening Balance Equity"

 

First, I think you meant Expense or Purchase Side of that two-sided item;

 

 

 

OK so leave out the word "income".  Just link the field that says "Account" to OBE and use it in both open invoices and open bills. It works just fine

Which means you never had this as expense at all. That is a pretty significant oversight.

 

There is no expense. It is increasing AP and increasing OBE, both balance sheet accounts.  No expense is involved in this, and if it was it would be wrong

You just aren't understanding this. And making bold and inaccurate statements like "See how all of that is Wrong?"

@Malcolm Ziman

It is time to get off the internet, open QB and make some Entries. How can you not understand this is wrong: "There is no expense. It is increasing AP and increasing OBE, both balance sheet accounts.  No expense is involved in this, and if it was it would be wrong"

If you have open AP from 2018, let's go with 1 new computer for $600, as Expense, for a Cash Basis entity, and they just now transition to QB, then that Bill has to be entered as Expense. When you Pay the bill in 2019, that posts as Expense. You cannot ignore that it wasn't reported as expense for 2018, and now you want to put it as Equity in 2019? That means you never had the Expense entry.

I want you to list and try the permutations. Here are your four conditions:

Open AR for Service item + noniventory + sales taxes from last year. Paid in This Year, for Cash Basis entity. Do it Your way, then Mine.

Open AP for that computer, dated in last year, paid in this year.

Do them both again for Accrual Basis.

All you need to do is enter the Bill and the Invoice with the proper and specific dates; the real entries, real items, due dates, etc. Now everything is Right for either basis; for aging. And for Financial reporting.

Then, you can get tricky and use OBE and set up all functions you learned about in Pro Advisor training.

Then run the reports on cash basis and on accrual basis. If you really have a Similar and valid method, the reporting should match.

Good Luck.

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@qbteachmt wrote:

 

If you have open AP from 2018, let's go with 1 new computer for $600, as Expense, for a Cash Basis entity ...

  

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This discussion about cash-basis is moot. Obviously a business that keeps it's books on the cash basis has no AP, or AR, so then there is no need to use OBE to raise AP, or AR.

Good try though