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Account for 1120S balance sheet discrepancies by adjusting additional pos in capital or retained earnings?

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Level 2

Balance sheet is out of wack. This is for a single person S Corp. I can adjust the additional paid in capital or change rather retained earnings. Is there a better option?


On a separate note, this taxpayer bought and wrote off a 6000 vehicle. They took a loan for it. The full vehicle is deductible, but showing the loan on the balance sheet makes it completely out of wack. It was a 100k vehicle. I assume I will need to adjust the additional paid in capital for him (they don’t have enough retained earnings because they distributed most). The asset of the truck just shows as cost - depreciated amount, which equals 0.  

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Level 12

You likely put something to the wrong place and/or didn't enter something at all. That's about the only way you can be "out of balance."

Can you give us your data, as examples? For instance, this: "this taxpayer bought and wrote off a 6000 vehicle"

Is often entered incorrectly as the purchase going directly to Expense. Then, the depreciation is also going to expense. Or, the Loan payments were posted to Asset value, and there never was the debt entered. These are common mistakes.


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Level 15
I believe that is the GIGO method of accounting. :wink::wink:

ex-AllStar
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Level 12

You show the loan because it still is owed, no matter the situation for the asset. Example:

Asset basis $100,000

Depreciation -$100,000 <== this is offset to Expense, so it affects the P&L, as Net Income which is part of Equity

Debt balance $85,000 <== pretending there was $15,000 downpayment

Equity $15,000 (from the downpayment) + $85,000 (the loan balance) + negative net income $100,000 (the Expense entry)

Assets = Liab + Equity

$100,000 - $100,000 = $0 asset

And Equity (which also is called Net Assets) = $0

That's in balance.

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Level 15

"Is there a better option?"

Yes, you need to have an in-balance working trial balance before you even start the return.

It should show:

Asset $ 100,000

Accum. Deprec ($ 100,000)

Truck Loan Payable 

IF down payment made

Cash ($ xx)

Truck Loan Payable $ xx

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Deprec Exp on P&L $ 100,000

ignoring ALL other income/expenses...the P&L will show a ($ 100,000)  which reduces the Retained Earnings on the Balance Sheet.

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Level 2
Yes, but in this case he only had 5K of retained earnings.  However he had a bunch in paid in capital.  I can reduce that to make it balance.  

I was also asking for future returns, if there is a preference on making adjustments on the retained earnings or the paid in capital accounts.  Some times it is off just off a bit.
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Level 15
You are missing the point that there shouldn't be any adjustment needed.
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Level 15
Retained Earnings can be negative, too.

ex-AllStar
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Level 2
I am saying the adjustment can either e on retained earnings, which would be negative, or could be a lower additional paid in capital account

As an example:
TP has a net income of $150K and  $0 retained earnings but has $150K of additional paid in capital
He wants to buy a truck, and is thinking about either taking a loan for the full $150K and distributing $150K to himself or paying $150K of cash for for the truck.

If he does the first option (take a loan and distribute to himself) he has no net income (the truck is a write off) and he distributes, which shows a negative balance of $150K.  That would go against is additional paid in capital account.  I notice pro series first would debit his retained earnings and then go to the paid in capital account.

On a separate topic, when you have clients that have a balance sheet that is just a little off, do you adjust retained earnings by making an adjustment (you could show them making a cash contribution as Other additions on M2, etc) or do you adjust the additional paid in capital account?  
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Level 12

I think I found your error in your thought process. This is wrong:

"If he does the first option (take a loan and distribute to himself) he has no net income (the truck is a write off),"

has nothing to do with the Net Income. Debt decreases equity and Distributions decrease equity, too. Even doing Both will not change income.

The purchase of the truck either outright or by debt, results in a new asset and the depreciation, making the Asset total change 0 and in your example, the depreciation coincidentally makes the Net Income 0. That doesn't change for whether there is distribution in addition, for whether the truck is bought outright or there is debt. Take just that first part: New asset, fully depreciated, and happens to be the same amount as the Net income (which is part of equity and becomes the RE). Once you state that "depreciation expense happens to = net income" then the rest is all Balance Sheet activity.

So, using the bank funds to buy the truck outright simply is Asset = Asset, or No Change to the balance sheet. Taking the funds as distribution is Reduction in Asset = Reduction in Equity, or No Change to the balance sheet. And, taking on debt to buy the asset decreases equity, so No Change to the balance sheet.

You cannot be Out of Balance, here. You seem to be posting something to the wrong place or forgetting about "the other side" of it.

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Level 15
We are saying "Why does there need to be an adjustment?"
Are you using He and the S-Corp synonymously?
How much is a little off? How about adjusting current year income or expense?

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