Frequently Asked Questions

What is the importance of accounting for S Corp?

Accounting for an S Corp is crucial for a variety of reasons. Firstly, an S corporation is a flow-through entity, which means the profits and losses flow through the corporation to the owners and shareholders. This unique structure means the corporation itself is not taxed, but the owners and shareholders must report these profits and losses on their personal tax returns. The amount each owner must report is limited to the amount of capital they invested in the business. The accounting system for an S Corp is similar to that of a C corporation, but there are differences due to the unique tax treatment. An S Corp should have four main equity accounts: 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. Unlike a C Corp, an S Corp can only have one class of stock, so one common stock account is sufficient. Distributions paid to the shareholders account is unique to S Corps as they don't pay dividends. Instead, the profits and losses are passed on to the owners, hence the term “distributions of earnings and profit.”