Opening Balance Equity, and Retained Earnings

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Index
06:09 Video begins on opening balance equity
10:51 Running the balance sheet report zeroed out
11:45 Scenario of starting business 01.01.2017
13:00 Contributing money to the company, adding in bank deposit
15:47 Adding in an invoice for consulting
16:24 Running the profit and loss, viewing the sales
17:33 Posting an invoice in January of year two
18:43 Viewing the balance sheet
20:00 Doing a search at the line item level
22:32 Adding in distributions
23:19 Closing retained earnings to shareholder capital explanation
24:30 Stick a credit card in the books to use for the company while it has a balance
26:00 Creating an expense categorized as prior period adjustments
28:44 Running the profit and loss to show expense 26:00
29:40 Adding a comment to a transaction
30:30 Once switching the credit card to business it must only be used as business
34:53 Audience question: PayPal statement not reconciled because of a carrying PayPal balance, use case for the prior period adjustment account
37:40 Bottom line for prior period adjustments
39:16 What some accountants do to avoid getting the attention of the IRS
43:09 Big balance sitting in a bank account
43:59 Setting up shareholder number two
45:45 Adding in the shareholder percentages to the name on their account for 43:59
48:12 Balance sheet view of distributing the retained earnings to shareholders
49:18 Adding in the journal entry to show 48:12
54:44 Where will this recording be available?
55:14 Demonstrating the loss
56:45 What to evaluate when creating the journal entry to show the loss
58:52 Definition of Bulletproof - being able to explain and track what was done
59:21 What are the Bulletproof bonus classes?
This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Nerd Enterprises, Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Nerd Enterprises, Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers and viewers should verify statements before relying on them.

[@BTFOOMNY]

New York CPA here, 35 years. I have a few comments.
1) I agree about Opening Equity. A new business does not need it, and an existing business should not need it. If it is an existing business, your opening balance sheet for the current year is the ENDING balance on last year's tax return, Schedule L. If it turns out that something really is missing, then the tax accountant needs to discuss filing amended tax returns.
2) Retained Earnings is a very complex account if the business is an S-corporation, especially if the corporation was a C-corp that converted to an S-corp.
3) S-corporations are not partnerships. You cannot "contribute" capital. The capital consists of Common Stock, Additional Paid-In Capital and Retained Earnings. The Common Stock amount is the number of shares outstanding times the par, or stated, value per share. Additional Paid-In Capital is any amount over the par value. Example: 100 shares of stock, at $10/share, sold to owner for $100,000. Debit Cash $100,000, credit Common Stock $1,000 and credit Paid-In for $99,000. After that, the only way to add funds is to sell more shares, or lend the money to the company.
4) If you truly are missing a credit card, then you probably missed expenses, credit liability, debit expense. If you are missing a PayPal account you are probably have unreported income, debit PayPal, credit income. You also may have unpaid state sales taxes.
WARNING: If there are multiple S-corp shareholders you must follow certain rules.
A) The stock can only be owned by an individual, a special trust, or a special S-corp.
B) Income and distributions must be made to all shareholders in their various percentages.
C) If you mess up either of these rules you risk blowing your S-corp election.
Always talk to your tax preparer first.

[@nerdenterprises]

Thank you for the feedback! I am certain I have seen many s-Corps with "Shareholder Contributions and Distributions?" Maybe they're all wrong?
In fact I have even been guided to make sure the Shareholders in an S-Corp have distributions proportionate to their ownership %.

[@BTFOOMNY]

@@nerdenterprises LLCs and partnerships allow for capital contributions, and there is no issue with keeping the percents straight. Each capital account is simply a bucket. Your income and capital percentages are determined by the partnership agreement, so capital account differences are okay.
Not so, for an S-corp. The capital amounts may be different if we did not both buy our shares from the corporation at the same time. You started the business five years ago, so the stock account and accumulated adjustments (retained earnings) are all yours. I want to buy in. We agree that 20% of the business is worth $200,000. Debit cash, credit common and paid-in for $200,000 total. I have accumulated adjustments until this year is over. That account is not divvied up, because it represents income YOU already paid tax on.

[@nerdenterprises]

@@BTFOOMNY Got it, thanks!

[@user-qi8uh2kb8k]

I wanted to clarify. You put the initial deposit in shareholders contribution account. When it comes time to do the taxes, he shouldn't have to pay taxes on the $15k retained earnings, because he's at a loss from his initial $100k initial investment. How would that be reported on a 1099-Dis?

[@nerdenterprises]

If we're talking about an S-Corp, the S-corp Net Income flows thought via K-1 to the Shareholders.
That is what the shareholders pay taxes on.
There is no form 1099-Dis that I am aware of.
There is a form 1099-Div which is for Banks and Other financial institutions to issue.
The only instance when an S-Corp shareholder would pay taxes on Distributions is if those distributions exceed their basis (net equity) in the corporation.

[@vmadar62]

Doesn't the program automatically make the entry of net earning to retained earning?

[@nerdenterprises]

Yes it does. But if you watch this video you will see where in some cases we do not want to leave it there in retained earnings (eg) when you have two or more owners and their shares in the company are not equal. There is also a whole structure that I am showing you here for how to deal with the equity section of the balance sheet in general. But MOST importantly this video shows you how NOT to use Opening Balance equity.

[@BTFOOMNY]

Use account numbers. Then you don't need you worry about alphabetical issues.

[@nerdenterprises]

Account numbers are awful. You run out of room, and then you can't find anything because you don't / won't memorize what account number is what! I would much rather have the alphabetical issues.

[@BTFOOMNY]

@@nerdenterprises Use four digits and plan ahead. 1001 to 1400 for current assets, 1401 to 1600 for fixed assets, etc. Leave gaps to allow for new accounts. When all else fails, go into the chart of accounts and change the account number. Quickbooks will correct every transaction throughout its history to the new number.

[@nerdenterprises]

@@BTFOOMNY Thanks! I know how it works. I just hate account numbers. They only get in the way, and never help! When I am searching (eg in a drop down) I like searching by name. Account numbers drive me crazy. When I get a new client if I see them I turn them off.

[@BTFOOMNY]

@@nerdenterprises I won't work without them. You can still use name search, but account numbers keep them in order. We do audits on 70 cooperative and condominium housing companies in New York City. Couldn't work with the numbers.