Retained earning difference

[AZ-Tax]

1120s net income matches bookkeepers P&L except for the fact the bookkeeper did not dedect "current depreciation". Net income is now 24% lower then P&L net income. Now balance sheet matches Sch L except for retained earning. If I override and enter the Balance sheet retained earnings, its balances, if not balance sheet's retained earnings is 75% lower then by not overriding. Does it matter with the retained earning that actual net income facting in current depreciation is 24% lower then the P&L's net income?

If the shareholder took distributions, how would it appear on the P&L and/or Balance sheet and would distribtions affect retained earning?

[taxxcpa]

Shareholder distribution

1120s net income matches bookkeepers P&L except for the fact the bookkeeper did not dedect "current depreciation". Net income is now 24% lower then P&L net income. Now balance sheet matches Sch L except for retained earning. If I override and enter the Balance sheet retained earnings, its balances, if not balance sheet's retained earnings is 75% lower then by not overriding. Does it matter with the retained earning that actual net income facting in current depreciation is 24% lower then the P&L's net income?

If the shareholder took distributions, how would it appear on the P&L and/or Balance sheet and would distribtions affect retained earning?

If it was in the form of salary, it would affect Retained Earnings. If it was recorded as a shareholder distribution (non salary) it would be a separate account in the Capital section of the balance sheet rather than a deduction from retained earnings--similar to Owner's draw in a sole proprietorship.

Take a look at the Tax Book's coverage of corporations and partnerships for some examples.

[Snaggletooth]

Book Statements

I believe the convention should be followed that:
1) Sch L Retained Earnings MUST equal "book" earnings.
2) Sch M should contain all differences between "book" earnings and taxable earnings.

I think if we get away from this convention, we just get ourselves in trouble.

In your situation, I believe the bookkeeper should adjust his financial statements for the missed depreciation. Often clients don't want to do this if they have already issued their statements to the bank, but I believe this to be so glaring as to warrant adjustment and republishing.

[AZ-Tax]

S-Corp distributions reduce?

Assuming there is enough net income, does a distribution to the sole shareholder reduce "shareholder basis" if applicable or reduce "net income" or both?

[Uncle Sam]

Retained Earning Difference

A-Z - why don't you take an accounting course?

It will answer most of the questions you ask on this board.

Just being a tax preparer without accounting knowledge - is a disservice to your clients.

[Snaggletooth]

Distributions

Assuming there is enough net income, does a distribution to the sole shareholder reduce "shareholder basis" if applicable or reduce "net income" or both?

AZ - Distributions (in general) reduce shareholder basis and retained earnings, but not net income. One way to think of this is that net income comes first, and then distributions occur to pay the profit to the owners. That doesn't mean the profit was less, it only means the profits have been removed to the extent of the distribution.

[Snaggletooth]

Good Grief

A-Z - why don't you take an accounting course? It will answer most of the questions you ask on this board. Just being a tax preparer without accounting knowledge - is a disservice to your clients.

Sam, this comment sinks beneath your standing and reputation.

Being a CPA means orientation probably begins first with GAAP, and in the aftermath of this knowledge it is applied as an integral part of tax work.

In contrast, many preparers start strictly by filling out 1040s, and build up quite an expertise in personal returns before becoming exposed to corporate returns and the need for GAAP. Having said that, I will agree that it would be virtually impossible to develop a commanding expertise of Sch L and Sch M without accounting knowledge.

Asking questions is one way to acquire knowledge, albeit often without formal approach.

[luke]

Snag

An excellent - brief but to the point explanation! Did you used to be a teacher/professor?

[Snaggletooth]

Luke

Thanks, Luke. You give me too much credit. As far as brief, most of my answers are anything but. It is true that I once taught Math in an Atlanta area high school years ago.

By the way, I love West Virginia.

[taxxcpa]

Accounting knowledge

A-Z - why don't you take an accounting course?

It will answer most of the questions you ask on this board.

Just being a tax preparer without accounting knowledge - is a disservice to your clients.

I think it is OK for someone without accounting knowledge to prepare Form 1040s if they know enough about the tax laws and their tax software. However if you are going to prepare returns that requires a balance sheet, you should have enough accounting training to know how to do it. A course in Elementary accounting would be sufficient if you really understand what is taught in that course.

[Bees Knees]

Maybe not as tactful as could have been – but the point about understanding accounting is valid.

One should not prepare corporation returns requiring a balance sheet without basic knowledge of accounting.

In my experience, most P&Ls I see prepared by clients or their bookkeepers are not yet ready for use on the 1120 or 1120S. I almost ALWAYS have to make some kind of accounting adjustments to their books. I always make those accounting adjustments, and then provide the client with instructions on how their books need to be adjusted before closing the books for the year.

TTB, page 18-26 says:

Schedule L, Balance Sheet per Books
The balance sheet should agree with the corporation’s books and records.

It the corporation’s books and records are incomplete, it is our job as the tax preparer to complete those books, or at least know enough about accounting to tell the client how to complete their books.

[sea-tax]

Maybe not as tactful as could have been – but the point about understanding accounting is valid.
.

But Bees you must admit that it was a pretty condescending way to get a point across.
Frankly comments like that is one "A-Z - why don't you take an accounting course?"-by Uncle Sam
is the main reason why I do not post on here as much as I used to. I would surmise that I am not the only one that feels like this. To bad becuase the rest of the posters miss out on what others have to say. Nobody wins.Just my two cents

[JohnH]

Brevity is a virtue.

[oceanlovin'ea]

some knowledge

I have been in the accounting field since I was in high school and worked for many different companies in many different areas of accounting.

Then after 20 years I got into tax preparation and have been doing taxes for more years than I did accounting work.

Most places I worked, I worked in a particular department such as payroll, accounts payable, inventory control, cost accounting, etc. I have even set up complete set of books for small companies. BUT that was before computers and it was done by hand.

Now working in QB, I find challenges in knowing what to enter where at times. There are some companies that have short courses you can take that will refresh your knowledge or even give you basic principles in accounting.

I purchased a couple of those and went through them just to get me back up to speed. Converting from bookkeeping to the tax return can be challenging at times.

So hang in there. I too appreciate being able to ask questions when my mind doesn't want to think like it should and getting help on this board without criticism. That is what makes this board special....

Sorry this is not so brief.

Linda

[Gretel]

I am also coming from the accounting field - learned it from scratch before computers in Germany and this is were my heart is. Basic accounting is the same no matter what country and I am very thankful that I was able to learn before computers. It's a certain set of thinking that helps me to be very creative with QB clients since I know how it has to turn out.

How to prepare a tax return for a business client is a different animal and I struggle once it gets more complex. I tried to find good sources of education and worked through an accounting book used in colleges myself but that did not help me with the corporation tax return.

So far, I was not able to find good education for this gap. This message board is and was a tremendous help in filling this gap plus a lot of reading whenever I encountered a problem. Until recently there wasn't even much of instructions from the IRS available. I still feel very uncomfortable and far away from having a grip on this. Every time I have to start from the beginning in trying to understand the logic.

All you experts who were fortunate enough to have some hands on experience in an accounting firm, be thankful. This is what I wish I could do. I slipped very naively into the tax business and never would have dared to start my biz had I known what it means. Never the less, I am very happy that I have my own business.

I also agree that basic accounting knowledge is needed to do the right thing on the clients books but the question remains on how to get there.