I have a very simple S-corp business, and have decided to do my own business return this year in order to save some money. I will use TurboTax business, but before I do I have been reviewing previous year's returns done by my accountant to be sure I understand how it all works. I run into a snag when trying to understand how my accountant did the balance sheet -- in particular, the APIC and R/E entries.

Here are all of the entries in the balance sheet
Cash = $6099
Inventories = $200
Total Assets = $6299

Capital stock = $100
Additional paid-in capital = $6312
Retained earnings = -$113
Total liabilities and shareholders' equity = $6299

How are the entries for additional paid-in capital and retained earnings determined? These didn't make sense to me when I look at the accounting equations I found from another posting:

Assets - Liabilities = Stockholders Equity
Stockholders Equity = Common Stock + Retained Earnings + APIC (Additional Paid in Capital)
Capital Stock= Common Stock + APIC + preferred Stock
assets – liabilities-capital stock = retained earnings

Okay, might be a little difficult to explain to a novice but I will do my best.

Additional paid in capital is the excess paid for the stock above its par value. So your capital stock should have a par value, let’s just assume of $1.00. Say you purchase stock in your company for $10 per share at 100 shares. You get 100 shares and the company (separate legal entity) gets $1000 ($10*100). Your company would record this transaction as follows:

Db Cr
Cash 1000
Capital Stock (at Par Value $1) 100
Additional Paid in Capital 900

So that is where the Additional paid in capital comes from, if you bought no more stock this year you don’t have to worry about this, it will be the same as last year.

Retained earnings account is the mechanism for how the income statement flows onto the balance sheet. At the end of the year you close all your temporary accounts (Revenues and Expenses) to the income summary account. You are zeroing out the balance in all these accounts. Revenues would typically have a credit balance, expenses a debt balance the difference between the two gets booked to the income summary account. The income summary account is then zeroed out to retained earnings. To illustrate this lets assume at the end of the year your account balances are:

Sales = 2000 Cr, Operating expenses = 1000 Db & Misc. Expense = 500 Db.

The entry would be:

Db Cr
Sales 2000
Operating expenses 1000
Misc. Expense 500
Income Summary 500

(To close out year end temporary account balances to income summary)

Next entry would be

Db Cr
Retained Earnings 500
Income Summary 500

So basically your income or loss at the end of the year flows onto your balance sheet to retained earnings. Income increases your retained earnings and a loss decreases them.

Edit: Okay the HTML cut out all my formatting and the above examples don't make sense, so I attached it in a word doc... Let me know if this helps

Thanks for the response - just for the record, I am a chemical engineer... and I do understand the concepts behind double entry accounting.

I appreciate your providing me with an example, but I can't relate your example with mine -- especially the part about "...if you bought no more stock this year you don’t have to worry about this, it will be the same as last year." We issued 100 shares at $1/share when we incorporated back in 1992 and we have never sold any additional shares. Based on this, then, the additional paid-in capital should remain unchanged from year to year at $0. But this isn't the case with the balance sheet prepared by my accountant.

let me know if you need any additional info..

George

Thanks for the response - just for the record, I am a chemical engineer... and I do understand the concepts behind double entry accounting.

I appreciate your providing me with an example, but I can't relate your example with mine -- especially the part about "...if you bought no more stock this year you don’t have to worry about this, it will be the same as last year." We issued 100 shares at $1/share when we incorporated back in 1992 and we have never sold any additional shares. Based on this, then, the additional paid-in capital should remain unchanged from year to year at $0. But this isn't the case with the balance sheet prepared by my accountant.

let me know if you need any additional info..

George

I am only assuming your par value is $1 it can be anything even $0.01, and don't mean to insult you by my answer I am sure you are a smart man you just don't do this every day and I have no way of knowing your level of understanding of accounting.

You issued the stock at $1 but is that what everyone paid for it? Furthermore, check back in your accounting records for the last few years, has this amount stayed constant? If so this is a mute point you’re APIC will be the same this year unless you issued more stock which you said you didn't.

If you don't believe me look here:

Paid in capital - Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Paid_in_capital)

Or here:

additional paid-in capital Definition (http://www.investorwords.com/97/additional_paid_in_capital.html)

If you need additional help come back tomorrow and I can always lookup the FASB that deals with APIC.