I do a client's bookkeeping and taxes. Their taxes before were simple, schedule C, now they are an S-corp. Their shareholder distributions keep going negative in quickbooks under their owners equity account. So all distributions are now negative. I understand Net Income will close out to Retained earnings next year. In reference to the negative balance on the "owner's equity" should I adjust this entry to zero it out for the beginning of next year, or does it remain negative? 

Some other forums say make an adjustment but I am not sure to what account. Also where do you report these Distributions on 1120s? Will I close them out to retained earnings and will they just show there or do they show on Schedule M-2 line Line 7? These are two shareholders. Thank you.