Balance Sheet, S-Corp

[geekgirldany]

New customer, while working on S-Corp the Balance sheet is way off like $45,000. I asked the customer for prior year returns. He brought from 1995 to 2006. Everything seemed okay until 2002. I looked back and noticed for several years the preparer did not list shareholder distributions. I found them all in QuickBooks. This seems to account for the big difference. There was no information on the Balance sheet from 2003 forward. Just blank.

How do I enter the adjustment on the Balance sheet page 4 for these past shareholder distributions? Should I change the beginning retained earnings? I don't really think it should go under shareholder distribution for this year because he did not take it out this year.

Not sure what to do really. I would appreciate any help.
THank yoU

[ChEAr$]

Ppa

Is abbreviation in accounting for "prior period adjustment". Very simply identify the charge
on the schedule M1 as such.

Unless of course this 11120s meets the criteria for not having to fill in L and m1.
does it?

[Snaggletooth]

Might be simple

Dany, could be simple if the corporation is sufficiently small.

Firstly, unless the shareholder(s) have taken distributions in excess of their basis, there is no taxation (at least for Federal), so the need of having impact individual returns and amended returns is very remote.

The distributions are "dividends" just like a C corporation. They're just not taxable. And distributions reduce Retained Earnings dollar for dollar.

I would therefore calculate the "beginning" balance as if the prior year distributions to shareholders had reduced Retained Earnings like they were supposed to do. Then I would simply enter the PROPER beginning balance on this year's Sch L.

From what you tell us, this proper beginning balance will not agree with the "ending" balance from the prior year. I would simply attach a statement explaining the difference.

Good luck - Snag

[taxxcpa]

Just report the correct beginning figures.

The best approach would be to report the correct figures for the beginning balances. Those incorrect figures on the previous return are not your fault.

If you report the correct income, that is the main thing. The balance sheet and other items on page 4 are only things that should reconcile with income, etc. assuming that the accounting is correct. However, you can make all kinds of errors that only affect the balance sheet and still have the income correct-- I wouldn't advise making any such errors, but you can't undo all prior errors without doing a lot of work you probably won't get paid for.

[oceanlovin'ea]

I do the balance sheet for my own satisfaction. Since it doesn't have to be sent in with return, most likely in the past they didn't send it in.

I agree to do it correctly and have your figures right. I have one now that I have to get started on. The balance sheet is UNBELIEVABLE. She was an older lady and that is why they were looking for a new preparer. They didn't feel they were getting the best from her anymore.

Linda F

[veritas]

I recall one year

when viewing a balance sheet in Quickbooks it had zero balances for an entire year.

They posted every debit and credit to to the same bank account.

That's what I call Quickbook's BS.

[Uncle Sam]

Balance Sheet, S Corp

"There was no information on the Balance sheet from 2003 forward. Just blank."

This is what I find criminal about the IRS policy change a few years ago - they gave practitioners an 'out' from not having to complete a balance sheet for those that qualified.
There are ALSO a number of preparers that don't know how to prepare a balance sheet to begin with and wouldn't know if they stepped over one.

[geekgirldany]

Thank you all for posting. I will make the adjustment and include a statement showing why it was changed. I just wanted to make sure how to do it.

I don't know something is up with 2002. A/R and A/P listed on the balance sheet but is a cash basis customer. These amounts do not jive with what QBs is reporting. Probably why there wasn't a balance sheet done in the following years.
Plus it appears that there may have been prior years where there was shareholder distributions but not enough shareholder basis/retained earnings to cover it so it was made into a shareholder loan. There are just several things going on here I've got to figure out.

I think a balance sheet should always be done. This customer was under the rule where one did not have to be filed but still.... When I first started I was told by my employer regarding balance sheets to "make it work". This resulted in problems down the road. All sorts of things can be missed if a balance sheet is not done.

[Snaggletooth]

Cash Basis

GeekGirl the presence of A/R and A/P on the balance sheet is very common, even for cash basis taxpayers. I have a couple large S corps that have automated accounting systems which report their financial statements on accrual basis, but save taxes by electing the cash basis.

Remember, the cardinal rule for presenting the balance sheet is that it must agree with the books of the corporation, and NOT necessarily the tax method. The M-1 reconciliation is designed to bring the "book" income in synch with the "tax" income.

In other words, anything creating a book-to-tax difference will fall out on the M-1. This commonly would include such things as 50% meals, cash-vs.-accrual methods, non-deductible expenses, book-to-tax depreciation etc. Can get messy, but this where your accounting and tax skills move to the forefront.

The M-1 reconciliation is also not always a requirement. I've gone behind some preparers who were obviously relieved that they didn't have to do one. But it is a matter of skill and keeping records intact.