Frequently Asked Questions
What are the four main equity accounts that an S corporation should have?
Understanding the accounting for an S corporation is crucial for maintaining a robust accounting method for your business. An S corporation, often referred to as a flow-through entity, is unique in that the money flows through the corporation to the owners and shareholders, who then report profits and losses on their personal tax returns. The accounting system for an S corporation is generally similar to that of a C corporation, but there are differences due to the unique tax treatment. Specifically, an S corporation should have four main equity accounts. These include Common Stock, Additional Paid-In Capital, Distributions Paid to the Shareholders, and Retained Earnings. Common Stock and Additional Paid-In Capital represent the total amount of capital invested into the business by each shareholder. Each shareholder should have his or her own account for stock and another for the additional paid-in capital. Unlike a C corporation, an S corporation can only have one class of stock, so one common stock account will suffice. Distributions Paid to the Shareholders is an account that, technically, doesn't pay dividends since the profits and losses of the corporation are passed on to the owners. Therefore, S corporations refer to this account as “distributions of earnings and profit.”
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