Balance sheet problem when asset is depreciating

[Golfer2016]

Hello,

I'm having trouble balancing a balance sheet.  Its a straight forward balance sheet, except for assets they have depleting assets (goodwill) and a car that is depreciating. 

Because these assets get smaller each year, the balance sheet is out of wack.  The liabilities (mostly paid in capital) is staying the same. 

How do i deal with this?

[Accountant-Man]

Let's assume that you have one asset, 100k, that has 20k depreciation each year. At the beginning of this year you had opening balances of 100k less 20k, or 80k. Good so far? 

You transfer from last year, so those numbers are in the beginning balance column. For this year, the balances should be 100k less 40k, or 60k.

1) You must enter the 100k in the ending balance column.

2) You can use the accumulated depreciation worksheet, clicking yes to have the new depreciation appear. 

3) You must go to the M1 under the balance sheet to check the box that book depr equals tax depr.

How does it look now?

[Golfer2016]

I get all of that, but let me detail my problem.

The TP set up a new S corp a few years ago.  He contributed $101,000.  $1,000 was capital stock, the other $100,000 went into additional paid in capital.

He depreciates the $100,000 by taking $20,000 per year.  

On the balance sheet, after the first year it shows $80,000 of assets.  However, the equity shows $100,000 of additional paid in capital.  It's out of balance.

Do I take out $20,000 of additional paid in capital to make it work?

[itonewbie]

There may be something I am missing... what is this capital contribution he is "depreciating" over 5 years?

[Golfer2016]

It’s actually goodwill. It’s over 17 years but I just wanted to make it easy to answer my question  

[TaxGuyBill]

---

@Golfer2016 wrote:

On the balance sheet, after the first year it shows $80,000 of assets.  However, the equity shows $100,000 of additional paid in capital.  It's out of balance.

---

I'm clueless about Balance Sheets, so I probably should keep quiet, but ...

If you claimed $20,000 of depreciation, doesn't that reduce Retained Earnings by $20,000?  Therefore balancing it out?

Again, I tend to be clueless in this regard, but I'm just throwing out a thought.

[Golfer2016]

Another question:  for capital contributions to a S corp (someone is starting a buisnes and puts cash in), can they decide to do that as paid in capital OR retained earnings?  If I make the adjustment for retained earnings, I think that helps the AAA.  

[TaxGuyBill]

Again, I'm not the one to ask, but I'm 'butting in' anyways.   😁

No.

The money that a shareholder puts money into the corporation is either a Capital Contribution, or if there are loan documents, a Loan.

Profit and Loss affect Retained Earnings.  So as I mentioned above, claiming $20,000 of depreciation would reduce Retained Earnings

So if we ignore all other income and expenses, in your example above, the top half of the Balance Sheet would have have $80,000 of assets ($100,000 minus $20,000 of accumulated depreciation).  The bottom half would have $100,000 of Capital Contributions, and negative $20,000 of Retained Earnings (a loss due to the depreciation taken).  So it would balance.

Again, I hope somebody can confirm or correct me.   😀

[Golfer2016]

So you’re saying the capital contribution doesn’t affect retained earnings? It also can’t affect the AAA. So is it just not reported on tax form and client needs to hold record for their own records? 

I guess if their documents say it’s $1/share and the Corp issued 1000 shares, $1000 goes to capital stock and $19000 is additional paid in capital? So if that’s right it would be recorded that way. 

[qbteachmt]

"On the balance sheet, after the first year it shows $80,000 of assets. However, the equity shows $100,000 of additional paid in capital. It's out of balance."

Did you forget that the $20,000 is part of Expenses?

Example (how I teach this):

Assets = Liab + Equity; the data tells a story, so let's turn that around...

Subtract Liab from each side (the formula stays equivalent).

Assets (what you Own) minus Liab (what you owe) = Equity or Net Assets or Ownership position

You own a $500,000 house; you have $300,000 mortgage; that means you have $200,000 Equity. Or, as I explain that in class: "If I get hit by a bus, you can sell my assets, pay off my debts, and party with the difference."

Income and expense ("temporary" accounts) always affect the balance sheet, because the changes here become Net Income(Loss) reflected in Retained Earnings (Equity). It doesn't matter how you slice-and-dice equity (RE, Capital Contributions, etc), it's all just "the Net position for this entity."

So, an Asset that is reducing in value means that reduction is taken as Expense. Let's do that math:

$100,000 Asset

=

$0 Liab (for example)

$100,000 Equity

Next year:

$100,000 Asset -$20,000 asset reduction (depreciation) = $80,000 total assets

$0 Liab

$100,000 Equity minus the New Expense of that $20,000 from the P&L (Income statement) = $80,000

The Balance Sheet balances.

Second year:

$100,000 Asset - $40,000 asset reduction (depreciation = $60,000 total assets

$0 Liab

$80,000 Equity minus the New Expense of that $20,000 from the P&L (Income statement) = $60,000

The Balance Sheet balances.

Rinse and repeat.

[Golfer2016]

Thanks. 

shat do you teach as it relates to capital contributions? Which account do you kit hat in? 

is my example of 20k, 1k goes to stock, 19k goes to additional paid in capital right?

[qbteachmt]

Stock values is an Equity account, such as that $1,000. Think of this as a "buy in" at a poker table. Put $1,000 on the table, and you just invested in the game. $1,000 Bank = an asset, for $1,000 Equity.

Additional Paid In Capital is also an Equity account, such as that $100,000. For instance, the person forming the corporation contributes a bunch of equipment (what they already owned) to the business formation, and that gives them $100,000 of Fixed Assets and $100,000 of Equity.

Please understand that I am not a CPA and my terminology is Street-Wise language. That's why my students, to this day, retained what I taught them, because I put it into daily perspective and not "accountant speak." I taught QuickBooks and Accounting at a LifeLongLearning Center for Adult continuing education. For instance, a Day Care Provider can get continuing ed credits for my classes to stay licensed; law firms would send their office staff to my classes and we would discuss income (legal fees) vs liability (retainers) per the MT Justice Foundation accounting handbook, using QB to do that correctly.

[qbteachmt]

Oh, for this: "is my example of 20k, 1k goes to stock, 19k goes to additional paid in capital right?"

No. You are posting Equity and Equity. If I understand everything you wrote so far, you are mixing up that $20,000 that is Expense.

"He depreciates the $100,000 by taking $20,000 per year."

On the P&L, the same as Rent Expense or Office Supplies = Depreciation Expense. I teach this as: "Not real dollars that reflect the loss or wear and tear on the value of the Asset over time per the IRS definition of that useful life."

"On the balance sheet, after the first year it shows $80,000 of assets. However, the equity shows $100,000 of additional paid in capital. It's out of balance."

The Equity is going to be effected by Net Income(Loss) from Operations. The $20,000 Expense is part of Operations.

[Golfer2016]

Let me back up. 

I was saying separately 

someone contributes 20k of cash and a 50k asset to a new corporation. The stock is being issues for $1 per share and 1000 shares. 

$1000 goes to capital stock. $69k goes to additional paid in capital. 

is that how you’d account for it? 

if there is Ninother income and expenses, they will have negative retained earnings because the fixed asset depreciates but the $69k stays in additional paid in capital. 

I also understand that contributions don’t affect AAA. So on new corporations new contributions don’t pay any bearing on AAA, right?

[qbteachmt]

"$1000 goes to capital stock. $69k goes to additional paid in capital.

is that how you’d account for it?"

You would have $20,000 bank asset and $50,000 Fixed/Other Asset as Debits. Then, $1,000 Capital Stock and $69,000 Paid In Capital as Equity Credits.

"if there is Ninother income and expenses, they will have negative retained earnings because the fixed asset depreciates but the $69k stays in additional paid in capital."

The Income & Expense activity is the (change of net assets from operations) for how this year ended (loss) and how the next year begins:

Bank $20,000

Fixed/Other Asset $50,000

Depreciation on Assets -$10,000 (example)

= $60,00 total "net" assets

And:

Stock $1,000 <== no change

Paid in Capital $69,000 <== no change

Retained Earnings -$10,000 <== loss

= $60,000 Equity, which is why the phrase "Net Assets" is also applicable here.

When there are liabilities, they reduce equity, because you owe something to others. When there are assets, they increase assets, because you own something of value.

If there was income above that depreciation expense, and it turned Net Income(loss) positive, that would be reported for taxes, and if not distributed, that is carried over as Retained (AAA).

That's why, in my class, I first show The Accounting Formula, then swap it to "common folk reckoning."

"I also understand that contributions don’t affect AAA. So on new corporations new contributions don’t pay any bearing on AAA, right?"

AAA is not Contributions. Remember my comment: It doesn't matter how you slice-and-dice it, Equity is Equity. Multiple equity accounts for tracking balances are for clarity.

For your first year of of operations, there is nothing "carried over."

I just reread your initial comments. You first stated the Liabilities are "The liabilities (mostly paid in capital) is staying the same." So, we seem not to be using the same understanding. Paid In Capital is not the same as Loaned. Liability = Borrowing and need to repay it.

Asset <== the Values for stuff we own, including money

Liability <== what needs to be Paid/Repaid

Equity <== the difference in the two above

Let's redo your math:

$20,000 bank asset

$50,000 Fixed/Other asset

= $70,000 Total asset

$69,000 Liab as Debt to Shareholder

+

$1,000 Stock issued

= $70,000 Equity

Second year:

$20,000 Bank

$50,000 Fixed/Other Asset

-$10,000 Asset depreciation

= $60,000 Total asset

$69,000 Debt to shareholder

$1,000 Stock

Net operating loss (going to RE) -$10,000

= $60,000 Equity

I hate working math in a scrolling window. I hope that all makes sense.

[qbteachmt]

I found a nice reference article:

https://www.thetaxadviser.com/issues/2017/aug/tracking-aaa-ep-transactions-involving-s-corps.html

[sjrcpa]

You got this part right.

[qbteachmt]

"You got this part right."

Paid In Capital = Equity, which I teach as "ownership position."

Loan from Shareholder = Liability, as debt. It would never be named Paid In Capital.

@sjrcpaDo you have any further input and what they should have done with that initial money? Why would they name it Paid In Capital, if they intended to be repaid? Because now this person seems to want to take back that amount:

https://proconnect.intuit.com/community/proseries-discussions/discussion/re-1120s-can-additional-pai...

[sjrcpa]

If they intended to be repaid, it should have been entered as a loan and appropriate loan documents, with adequate stated interest should have been drawn up. 

Entering as additional paid in capital implies it was in fact, a capital contribution (equity).