S Corp - Equity Section

[solomon]

What are the accounts normally shown on balance sheet for equity.

Retained Earnings
Current Earnings - until closed
Capital Contributions
Stock Issued - or is this part of capital contributions
Accumulated Adjustment Account - assuming first year of operations the accumulated adjustment account and retained earnings would be same - no distributions at that point. If on first day of following year shareholder took distribution, dr - accumulated adjustment account and cr- cash. Then nothing would be done to retained earnings - correct.
The C corp. just formed and will elect S corp. status.

[Uncle Sam]

S Corp Equity Section

Assuming S Corp was always an S Corp, and never a C Corp, there would be no retained earnings.
Also, another equity account not included in your list is "Treasury Stock"

[solomon]

Then on closing at year end, current earnings goes into the Accumulated Adjustment Account? Also, in dollar figures, is stock issued (only one shareholder) the same as capital contributions?

[Uncle Sam]

Equity Section

Then on closing at year end, current earnings goes into the Accumulated Adjustment Account? Also, in dollar figures, is stock issued (only one shareholder) the same as capital contributions?

Yes, current earnings/loss gets posted to AAA.
Regarding stock value, in most instances, yes. However, the shareholder may also lend money to the corporation that he/she expects to be paid back and not capitalized.

[BOB W]

Capital

It would be wise to at least have $100 deposited into the Capital account with a separate check. Other monies can go to Loans from officers. This is all assuming that "No Par" stock was issued. If there was a "Par" per share value stated in the corporate charter then the amount of shares outstanding needs to be funded into capital.

You may want to read up on "Thin Incorporations" to make sure your client's business operation will not be at risk. I do "thin incorporations" all the time for mom & pop operations.

http://www.calfirstholdings.com/Part2.html#29

[solomon]

Thanks. Don't know yet if it is Par or not. Assuming it is, other than current earnings, is the accumulated adjustment account the only other account that has to go into the equity section?

[BOB W]

No .................

.... you also need the Capital account. The Capital account is the amount of initial investment to purchase the stock of the corporation ($100+).

[Gretel]

Confused

Why do we have a line on Sch. L called "Retained Earnings" if it is not supposed to be on the books?

So which account do you use for Earnings from prior years which have not been paid to shareholder? It can't be a loan since loans require to be loans. Confused now.

[solomon]

Given any additional money the shareholder put into S Corp for future purchase of rentals - as this what this on is, namely residential rentals, he would not treat it as a loan. Consquently, would there be a separate Contributions account in the equity section?

[solomon]

Correct me if incorrect. Just formed C corp will elect S status. Stock at no par value. His paid in capital 200,000. ***uming end of year there is net earnings of 30,000. At year end balance sheet equity looks like this?

Stockholder Equity

Paid in Capital 200,000

Accumulated Adjustment Account 30,000

Total Stockholder Equity 230,000

On first of following year he takes a 50,000 distribution then
Paid in Capital now is 180,000
Acc. Adj. Acct. now is 0

Is that correct? No retained earnings account as there was no prior C corp income. Since no prior C income this is considered a return of capital? In this case there would never be a distribution as a dividend. As I understand the regs. in this case this S corp would be considered as having no earnings or profit because it never had income as a C corp. Therefore, all distributions are a return of capital and his Equity in this case is his basis as well. This all ***uming there were no separately stated items etc.

[Uncle Sam]

S Corp Equity Section

Solomon - you're making more of a problem than actually exists.
If the stockholder funded the corporation in exchange for his capital stock, then the $ 200,000 is Capital Stock, NOT paid in capital. Paid in capital are ADDITIONAL contributions to the corp. AFTER the initialization of the corporation.
If distributions are larger than the AAA balance, the excess DOESN'T reduce the Capital Stock balance - he's not redeeming shares of the corporation. The Dr. balance just remains in AAA until future profits bring the balance back up again.
Distributions should NOT be in excess of AAA, but if they are, then the shareholder just pays income tax on the difference as ordinary income, and reduces his basis.

[solomon]

Thanks Uncle Sam. Distributions in excess of AAA would be ordinary income. However, would not the original 200,000 be part of basis?

[Uncle Sam]

S Corp Equity Section

Yes - it would be.

[solomon]

Then why would distribution in excess of AAA be income to shareholder when the distribution did not exceed basis. Don't understand that.

[Uncle Sam]

S Corp Equity

Because Capital Stock has no effect on current earnings, and distributions are supposed to come from earnings. The Capital Stock issue comes into play when determining loss calculations - where you can't deduct losses in excess of basis.