First year filing as an 1120-S. I have the balance sheet from the accountant, and it has information that has accumulated over years. The business had a profit this year of $274,000 (flowing into the retained earnings section on Schedule L) but the balance sheet has the retained earnings as $823,000. What's the proper way of handling this being that no balance sheet was ever needed in the past since they filed as a Schedule C?
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I suggest you check out the rules for a Section 351 incorporation that outlines the procedures to be taken upon the conversion.
Did you file a Form 2553 S Corp election form?Uncle Sam, CPA, EA. ARA, NTPI Fellow -
Yes, the form 2553 was filed and approved.
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State 2553 equivalent too, if there is one in your state?Uncle Sam, CPA, EA. ARA, NTPI FellowComment
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Yes, state too.
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OK, back to your actual question.
"The business had a profit this year of $274,000 (flowing into the retained earnings section on Schedule L) but the balance sheet has the retained earnings as $823,000"
I don't understand the problem. The retained earnings should represent the accumulation of all the prior year's annual income/loss, plus (possibly separate) equity accounts for owner contributions and distributions. It is very normal for the BS amount for retained earnings to be different from the current year profit.
If you enter the BOY (beginning of year) balance sheet on Schedule L, EOY balance sheet, and all the income/contributions/distributions, everything should tie out.
To get a better answer, maybe you can give us a condensed version of the BOY and EOY balance sheet. -- You could show just the total assets, total liabilities, and then break out the equity accounts in more detail."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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Total Assets EOY $90,193.79
Total Liabilities EOY $25,521.69
Shareowner's drawer -BOY -$731,201.90 EOY -$949,122.29
Shareholder Equity -BOY & EOY -$21,547.95
Retained Earnings-BOY $551,691.16 EOY $823,095.44
I'm also finding that no depreciation entries have been recorded in the books either.Comment
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You didn't provide BOY assets and liabilities as requested. And when you provide "Total liabilities", please make sure you are not including any equity items.
How is it the shareholder's equity is negative? What is the amount shown for capital stock and additional paid in capital?
Your numbers indicate that there were shareholder distributions of $217,920, correct? (compared to net profit of $274K)
"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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BOY Total Assests $62,223.09
BOY Total Liabilities $25,386.36
BOY Shareowner's drawer -$721,201.90
BOY Shareholder Equity -$21,547.95
BOY Retained Earnings $422,901.32Comment
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351 incorporation - transforor and transforee statements, and 2553 timely filed - "Uncle has it"Comment
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Others are answering about how to show the transfer of assets into the corp. I'm still on the more fundamental question of whether/how the business's books are kept. Regardless of tax treatment, the business should have books where the balance sheet satisfies the fundamental accounting equation (assets = liabilities +equity). Does your business balance sheet actually actually "balance" out, either a BOY or EOY?
However, still not enough info. Between post #7 and post #9, your numbers for BOY shareholder draw and retained earnings changed significantly. Plus, you didn't answer all my questions in post #8. (In that post, I was using S-corp balance sheet terminology, but even as a Schedule C business, you should have a section that shows, either separately or combined, the total history of owner contributions, distributions, and net income, added up for all years.)
Just looking at your post #9, if you add together your equity numbers you get a large negative number, which seems to have no bearing whatsoever to assets. Based only what you have presented here, it appears the balance sheet you are looking at is pure garbage."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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So, I'm looking more and more into each line item, and I would agree that this may be garbage. I have the Shareholder Draw entries and there is a distribution offset for the amount of the payroll. Since it was being taxed as a disregarded entity and on a Schedule C, there should not have been and opening balance in the Retained Earnings at all. This would be true of the Shareholder Draw and Equity account as well.Comment
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