Archive for Self Employ

How to calculate stock and loan basis in an S Corp for tax purposes

February 27, 2013 Basis, Corporation, Cost Basis, Depreciation, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

If you are a shareholder of an S corporation you are responsible for keeping track of your own basis (investment value) in the S corporation of which you own shares.  Tracking shareholder basis is usually not the S corporation’s responsibility.

You can have stock basis and loan basis, which are usually adjusted each year based on the S corporation’s operations. 

It is important to annually calculate your shareholders basis in the S corporation stock you own for the following reasons:

• You can claim losses and deductions passed through on Schedule K-1 to the extent of their stock and loan basis [§1366(d)(1)].

• If you receive a non-dividend distribution from the S corporation, it’s nontaxable to the extent of you stock basis [§1368(b)(1)].

• When you disposes of the S corporation stock, gain or loss on the disposition is calculated using you stock basis.

Stock basis starts with your initial contribution of capital to the S corporation’s capital account or the price paid for the stock. This amount is adjusted annually, as of the last day of the S corporation year, in the following order [Reg. §1.1367-1(f)]:

(1) Increased by all income including tax-exempt income reported on Schedule K-1 and excess depletion.

(2) Decreased by property distributions including cash made by the S corporation that are reported on Schedule K-1 in Box 16 with code D.

(3) Decreased by nondeductible non capital expenses, such as illegal bribes, kickbacks, fines and penalties, expenses and interest related to tax-exempt income, and the nondeductible portion of meals and entertainment.

(4) Decreased by deductible losses and deductions reported on Schedule K-1.

Stock basis can never go below zero.

If non dividend distributions exceed stock basis, the excess is taxed as capital gain on your personal return [§1368(b)(2)].

If deductible losses and deductions exceed stock basis, they can be deducted to the extent you have loan basis and any amount in excess of loan basis is suspended and carried over to the succeeding tax year.

You can elect to reduce your stock basis by deductible losses and deductions before decreasing their basis by non deductible expenses [Reg. §1.1367-1(g)]. If this election is made and nondeductible expenses exceed your stock and loan basis, the excess retains its character and is carried over to the succeeding tax year. If the election is not made, any excess nondeductible expenses are lost, not suspended and not carried over.

Loan basis starts with a loan substantiated with loan documentation from you the shareholder of the S corporation to the S corporation. In other words, it includes a traditional, written note with a reasonable stated rate of interest. It does not include third party loans to the S corporation that you guarantee or co-signs.

Loan basis is adjusted as follows:

• Losses and deductions (deductible and nondeductible) passed through on Schedule K-1 reduce stock basis before they reduce loan basis.

• Loan basis can never go below zero. If deductible losses and deductions exceed your stock and loan basis, the excess is suspended and carried over.

• If there are different types of losses and deductions, the allowable loss and deduction items must be prorated.

• If loan basis has been reduced by pass-through losses and deductions, any net increase in a subsequent year restores the reduced loan basis before it increases your stock basis [Reg. §1.1367-2(c)].

A net increase is the amount by which the increases to stock basis exceed the decreases to stock basis including non dividend distributions.

• Non dividend distributions are not taxable if there is a “net increase” for the year, even if you have no stock basis.

• Reduced loan basis is restored by any “net increase” for the year before any loan repayments during the year are taken into account [Reg. §1.1367-2(d)(1)].

These loan repayments must be allocated in part to a return of your basis and in part to the receipt of income. If the loan is a written note, the note is a capital asset and the income will be capital gain.

As an S corporation shareholder you must establish that you have enough basis in the S corporation before you can claim any pass-through losses or deductions. Basically S corporation shareholders usually tend to get into trouble when they assume that non dividend distributions from an S corporation are entirely nontaxable. Be sure to verify that the distribution does not exceed your stock basis. Also be sure to be aware of the various ordering rules for adjusting stock and loan basis in an S corporation.

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The New Home Office Deduction Safe Harbor – IRS Rev. Proc. 2013-13

January 18, 2013 Business Expense, Deductible Expense, Employee Business Expense, Self Employ, Small Business, Tax Deductible Expenses, Tax Guidance & Preparation, Tax Records

The Internal Revenue Service announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in

IRS Revenue Procedure 2013-13

This Rev. Proc. provides an optional safe harbor method that may be used to determine the amount of deductible expenses attributable to certain business use of a residence during the taxable year.  This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses for purposes of satisfying the requirements of § 280A of the Internal Revenue Code.

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually. It also provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a IRS Form 8829 calculating allocated expenses, depreciation and carryovers of unused deductions.  Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

This new option is available starting with the 2013 return most taxpayers file early in 2014.

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Withholding Tax for Social Security Goes to 6.2% of Wages

January 6, 2013 Employment Tax, FICA, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

Contrary to the manufactured ‘news’ dribbling out of the main stream media to sell advertising, last week the IRS published updated employer’s withholding guidance clearly stating that employers are to now withhold Social Security tax at the rate of 6.2 percent of wages rather than the previous rate of 4.2 percent in place for the past two years.

Alas THOSE OF US IN THE ‘MIDDLE CLASS’ WITH JOBS ARE ALL PAYING MORE TAX!!

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The ‘Fiscal Cliff’ and Your Tax Obligations

January 2, 2013 Capital Gain, Charitable Contribution, Children, Earned Income Tax Credit, Education Expense, Estate Tax, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Social Security Tax, Tax Filing Status, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Relief, Taxable Income

Our esteemed President has proven to me to be extraordinarily disingenuous with his statements about the middle class and their purported tax obligations as pretty much everyone’s taxes will go up in 2013 as a direct result of the cumulative efforts of our ‘elected officials’ over the last few days.  Please don’t get me wrong as I find the man’s leadership in most regards to be much more stoic than any other President in my life time.

What I find particularly galling however is that everyone it seems from pundits to established economists speak about the need to create jobs in America as the best way to reduce the deficit. I believe as a matter of principal that the best way to create jobs from a policy or legislative perspective is to drastically reduce employment tax and to completely eliminate self employment tax as these are some of the biggest costs and risks associated with being an employer or job creator.

Either way if you would like to read the actual legislation a pdf version can be found here at the US Government Printing Office and summaries can be found here at the Library of Congress.  The following are some highlights of what to expect:

Starting in 2013, there will be a new 39.6% rate placed on these thresholds:

  • Married Filing Jointly: $450,000 of taxable income

  • Qualifying Widow(er):  $450,000 of taxable income

  • Head of Household: $425,000 of taxable income

  • Single: $400,000 of taxable income

  • Married Filing Separately: $225,000 of taxable income

Starting in 2013 the tax rates on long-term gains would be:

  • 0% if income falls below the 25% tax bracket

  • 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate

  • 20% if income falls in the 39.6% tax bracket

The Senate proposes the following AMT exemption amounts for 2012 indexed for inflation starting after 2012:

  • Married Filing Jointly: $78,750

  • Qualifying Widow(er): $78,750

  • Single: $50,600

  • Head of Household: $50,600

  • Married Filing Separately: $39,375

The proposed threshold amounts at which itemized deductions would start to be limited are:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes to re-instate the personal exemption phase-out starting in 2013. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 by which adjusted gross income exceeds the threshold. The proposed threshold amounts for 2013:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes that the following tax provisions be extended through the end of the year 2017:

  • American Opportunity Credit

  • Child Tax Credit at $1,000 maximum and partially refundable

  • Earned Income Credit for 3 or more dependents

The following provisions would be extended through 2013:

  • Educator expenses deduction

  • Exclusion for cancellation of debt on primary residences

  • Mass transit and parking benefits excluded from income set at maximum of $175 per month.

  • Mortgage insurance premium deduction

  • Deduction for state and local sales taxes

  • Charitable deduction for donating real property for conservation purposes

  • Tuition and fees deduction

  • Exclusion for charitable distributions from individual retirement accounts

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IRS Form 1040 Line 21 and Subsequent CP2000 Notices

December 3, 2012 Self Employ, Small Business

IRS CP2000 notices are annoying for a wide variety of reasons but mostly because the IRS assumes that most all items reported on line 21 of IRS From 1040 are subject to self-employment (SE) tax.

Much of what goes on line 21 (trustee fees for executors, prizes and awards, gambling winnings, cancellation of debt income, foreign pensions) is NOT subject to SE tax. What is driving this CP 2000 project inside the IRS causing all these no-change audit determinations?

First I learned the notices are reviewed inside the IRS prior to issuance, but it appears that the old e-file system did not provide the “dotted line” between the explanation provided on the return and the amount reported on line 21. Second and more importantly even though most of what goes on line 21 is not subject to Self Employment tax, the IRS finds that many taxpayers (and preparers) routinely include items subject to SE tax on line 21. Or in the opinion of the IRS many preparers and taxpayers prepare the form incorrectly without fully recognizing the implications of their entries on line 21. The result is that in many cases IRS’ proposed assessments are correct. The bottom line is to really understand the items being reported on line 21 of IRS Form 1040 and do not report any items here that may be subject to SE tax.

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The Self-Employment Contributions Act

November 19, 2012 Self Employ, Sole Proprietor

The Self-Employment Contributions Act (SECA) imposes two taxes on self-employed individuals: an old-age survivors and disability insurance tax (OASDI) commonly referred to as Social Security tax, and a hospital insurance or Medicare tax (HI). These SECA taxes apply to net earnings from self-employment above a $400 minimum for the tax year. There is an annually-adjusted ceiling limitation on the amount subject to OASDI tax ($106,800 for 2011) which is reduced by any wages received by the individual in the same tax year. There is no limit on the HI tax.

In 2011 only, the tax rate for the OASDI portion of the SECA tax was 10.4%, and the combined OASDI and HI rate on net earnings from self-employment up to $106,800 is 13.3% rather than 15.3%. The rate on net earnings from self employment in excess of $106,800 is 2.9%. The maximum savings for self-employed persons is $2,136 ($106,800 x .02).

The income tax deduction under IRC Sec. 164(f) allows for deduction of the full employer share and is computed for 2011 as follows:

• 59.6% (0.062÷0.104) of the OASDI paid; plus
• 50% of the HI tax paid.

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Self Employed Health Insurance Insurance Deduction: Worksheet v. IRS Publication 535

October 25, 2012 Deductible Expense, Health Insurance, Partnership, Self Employ, Small Business, Sub-chapter S

If you qualify to take the deduction, use the Self-Employed Health Insurance Deduction Worksheet to figure the amount you can deduct. However use IRS Publication 535 instead if any of the following applies.

  • You had more than one source of income subject to self-employment tax.

  • You file Form 2555 or 2555-EZ.

  • You are using amounts paid for qualified long-term care insurance to figure the deduction.

According to IRS INSTRUCTIONS you may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2011, even if the child was not your dependent. A child includes your son, daughter, stepchild, adopted child, or foster child.

Self-Employed Health Insurance Deduction Worksheet

  • If, during 2011, you were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation pension recipient, see the instructions for Form 8885 to figure the amount to enter on line 1 of this worksheet.

  • Be sure you have read the Exception in the instructions for this line to see if you can use this worksheet instead of Pub. 535 to figure your deduction.

1.

Enter the total amount paid in 2011 for health insurance coverage established under your business

(or the S corporation in which you were a more-than-2% shareholder) for 2011 for you, your spouse, and your dependents. Your insurance can also cover your child who was under age 27 at the end of 2011, even if the child was not your dependent. But do not include amounts for any month you were eligible to participate in an employer-sponsored health plan or amounts paid from retirement plan distributions that were nontaxable because you are a retired public safety officer

1.

2.

Enter your net profit* and any other earned income** from the business under which the insurance plan is established, minus any deductions on Form 1040, lines 27 and 28. Do not include Conservation Reserve Program payments exempt from self-employment tax

2.

3.

Self-employed health insurance deduction. Enter the smaller of line 1 or line 2 here and on

Form 1040, line 29. Do not include this amount in figuring any medical expense deduction on Schedule A

3.

*If you used either optional method to figure your net earnings from self-employment, do not enter your net profit. Instead, enter the amount from Schedule SE, Section B, line 4b.

**Earned income includes net earnings and gains from the sale, transfer, or licensing of property you created. However, it does not include capital gain income. If you were a more-than-2% shareholder in the S corporation under which the insurance plan is established, earned income is your Medicare wages (box 5 of Form W-2) from that corporation.

One of the following statements must be true.

  • You were self-employed and had a net profit for the year.

  • You were a partner with net earnings from self-employment.

  • You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.

  • You received wages in 2011 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.

The insurance plan must be established under your business. Your personal services must have been a material income-producing factor in the business. If you are filing Schedule C, C-EZ, or F, the policy can be either in your name or in the name of the business.

If you are a partner, the policy can be either in your name or in the name of the partnership. You can either pay the premiums yourself or your partnership can pay them and report them as guaranteed payments. If the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premiums as guaranteed payments.

If you are a more-than-2% shareholder in an S corporation, the policy can be either in your name or in the name of the S corporation. You can either pay the premiums yourself or the S corporation can pay them and report them as wages. If the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you. You can deduct the premiums only if the S corporation reports the premiums paid or reimbursed as wages in box 1 of your Form W-2 in 2011 and you also report the premium payments or reimbursements as wages on Form 1040, line 7.

But if you were also eligible to participate in any subsidized health plan maintained by your or your spouse’s employer for any month or part of a month in 2011, amounts paid for health insurance coverage for that month cannot be used to figure the deduction. Also, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2011, do not use amounts paid for coverage for that month to figure the deduction.

If you were eligible to participate in a subsidized health plan maintained by your spouse’s employer from September 30 through December 31, you cannot use amounts paid for health insurance coverage for September through December to figure your deduction.

Medicare premiums you voluntarily pay to obtain insurance that is similar to qualifying private health insurance can be used to figure the deduction. Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction.

If you qualify to take the deduction, use the Self-Employed Health Insurance Deduction Worksheet to figure the amount you can deduct. However use IRS Publication 535 instead of the Self-Employed Health Insurance Deduction Worksheet in these instructions to figure your deduction if any of the following applies.

  • You had more than one source of income subject to self-employment tax.

  • You file Form 2555 or 2555-EZ.

  • You are using amounts paid for qualified long-term care insurance to figure the deduction.

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IRS Forms 8941 + 3800 Calculating + Claiming Small Business Health Care Tax Credit

July 25, 2012 Health Care Tax Credit, Health Insurance, Self Employ, Small Business, Tax Credit

For tax years 2010 to 2013, the maximum credit for eligible small business employers under the Small Business Health Care Tax Credit is 35 percent of premiums paid and for eligible tax-exempt employers the maximum credit is 25 percent of premiums paid.  Beginning in 2014, the maximum credit will go up to 50 percent of qualifying premiums paid by eligible small business employers and 35 percent of qualifying premiums paid by eligible tax-exempt organizations.

Start by determining if your organization qualifies for the credit by assessing whether it has less than 25 full-time equivalent employees that earn an average wage of less than $50,000 a year and your organization pays at least half of employee health insurance premiums. If your organization meets this criteria it is referred to as a “qualifying business.” Next use IRS Form 8941 Credit for Small Employer Health Insurance Premiums. Last use IRS Form 3800, General Business Credit, to claim the credit.

Tax-exempt organizations can use IRS Form 8941 to calculate the credit and then claim the credit on IRS Form 990-T, Exempt Organization Business Income Tax Return.

If your organization couldn’t use the credit in 2011 there may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

Also be sure to check out the IRS’ YouTube Video on the topic

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US Treasury SS-8 Determination of Worker Status for Purposes of Federal Employment Tax

June 4, 2012 Appeals & Audit Resolution, Audit Reconsideration, Business Expense, Employee Business Expense, Employment Tax, FICA, Payroll Tax Problems, Self Employ, Small Business, Sub-chapter S, Tax Guidance & Preparation, United States Treasury

In my dealings with the US Treasury Department regarding worker classification disputes I have learned that although in reality there may be shades of gray distinguishing between what constitutes an employee and what constitutes an independent contractor the US Treasury has some very specific positions.  Here are four that will hopefully help you make the correct determination and avoid future problems:

1. A relationship between an employer and an employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to what is to be done, but also how it is to be done.  It is not necessary that the employer actually direct or control the individual, it is sufficient that the employer merely has the right to do so. The designation of a worker as an agent, sub-contractor or independent contractor is irrelevant if the relationship of employer and employee exists.  The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed.

2. A worker who is required to comply with another person’s instructions about when, where and how he or she is to work is ordinarily an employee.  This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.  Some employees may work without receiving instructions because they are highly proficient and conscientious workers or because the duties are so simple or familiar to them.  Furthermore, instructions, that show how to reach the desired results, may have been oral and given only once at the beginning of the relationship.

3. Lack of significant investment by a person in facilities or equipment used in performing services for another indicates dependence on the employer and, accordingly, the existence of an employer-employee relationship.  The term “significant investment” does not include tools, instruments, and clothing commonly provided by employees in their trade; nor does it include education, experience or training.

4. A person who can realize a profit or suffer a loss as a result of his or her services is generally an independent contractor, while the person who cannot is an employee.  “Profit or loss” implies the use of capital by a person in an independent business of his or her own.  The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and, thus, does not constitute a sufficient economic risk to support treatment as an independent contractor. If a worker loses payment from the firm’s customer for poor work, the firm shares the risk of such loss. Control of the firm over the worker would be necessary in order to reduce the risk of financial loss to the firm. The opportunity for higher earnings or of gain or loss from a commission arrangement is not considered profit or loss.

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Cash Basis Balance Sheet Basic Overview

March 13, 2012 Accounting Method, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests

Having spent way too much time dissecting a balance sheet today I thought it might be a good idea to put out a cash basis balance sheet basic overview post.

A balance sheet is a snap shot at a specific point in time – usually the end of a quarter or fiscal year – that depicts the value of an entity’s assets as they relate to its liabilities and equity.  The basic formula or equation that needs to balance is …

ASSETS = LIABILITIES + OWNER’S EQUITY

I learned how to run a trial balance on a chart of accounts back in the 80′s at Marquette University and find myself to this day going back to the basic precept of ‘T’ accounts to untangle the most complicated balance sheets.  Leave it to the Jesuits to know their accounting.

In the ‘T’ accounts most primitive form, whenever a transaction is recorded 2 entries are made, one on the left side of the ‘T’ account and the other on the right side of a corresponding ‘T’ account.  This will be broken down further below but generally speaking when it comes to cash basis balance sheets if a chart of accounts is set up with the general idea of ‘T’ accounts in mind then running a trial balance at the end of a period should be a breeze.

In my opinion the basic rules of thumb for building or reconstructing a balance sheet are as follows:

1. Analyze the financial event or transaction.

2. Identify the accounts affected.

3. Classify the accounts affected.

4. Determine the amount of increase or decrease for each account.

5. Apply the left-right rules for each account affected. Make the entry in T-account form.

6. ‘T’ account names should ideally correspond to the line items listed on the balance sheet such as Cash, Prepaid Rent, Supplies, Account Payable and Equity,.

Again for a balance sheet to ‘balance’ as it were the value of the entity’s assets must equal the sum of its liabilities plus its owner’s equity.

Asset accounts show items of value owned by a business. For example say you invested $100,000 in a corporation. That cash infusion is now an asset of the corporation. Cash increases appear on the left side of the Cash ‘T’ account, an asset account. Decreases are shown on the right side. The cash investment of $100,000 (a) is recorded on the left side of the Cash account.

Cash

+

–

(a) 100000

When you invested $100,000 in this corporation you become an owner or of the corporation. Owner’s equity appears on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Increases in owner’s equity appear on the right side of the T account. Decreases in owner’s equity appear on the left side. In this case an investment of $100,000 (a) increases your capital account by $100,000 and is entered on the right side of the Capital account.

Shareholder ‘X’, Capital

–

+

(a) 100000

In this case you invested $100,000 from your personal savings into the business checking account creating the following entries:

a. The asset account, Cash, is increased by $100,000.
a. The owner’s equity account is increased by $100,000.

Left-Right Rules for ‘T’ accounts

Again keeping in mind that the equation is basically

Asset ‘T’ Accounts = Liability ‘T’ Accounts + Owner’s Equity ‘T’ Accounts

Left – Increases to asset accounts are recorded on the left side of the T account, decreases on the right.

Right – Increases to owner’s equity and liability accounts are recorded on the right side of the T account, decreases on the left.

Cash

+

–

(a) 100000

Shareholder ‘X’ Capital

–

+

(a) 100000

Recording an Asset Acquisition
The business issued a $5,000 check to purchase a computer and other equipment.

b. The asset account, Equipment, is increased by $5,000.
b. The asset account, Cash, is decreased by $5,000.

Equipment

+

–

(b) 5000

Cash

+

–

(a) 100000

(b) 5000

Recording a asset purchase using credit

Liabilities are amounts a business owes its creditors. Liabilities appear on the right side of the accounting equation (Assets = Liabilities + Owner’s Equity). Increases in liabilities are on the right side of liability T accounts. Decreases in liabilities are on the left side of liability T accounts. For this example let’s say the business bought office equipment for $6,000 on account from Office Plus.

c. The asset account, Equipment, is increased by $6,000.
c. The liability account, Accounts Payable, is increased by $6,000.

Equipment

+

–

(b) 5000
(c) 6000

Accounts Payable

–

+

(c) 6000

Purchasing Supplies with Cash

The business issued a check for $1,500 to North Shore Office Supply, Inc to purchase office supplies.

a. The asset account, Supplies, is increased by $1,500.
b. The asset account, Cash, is decreased by $1,500.

Supplies

+

–

(d) 1500

Cash

+

–

(a) 100000

(b) 5000
(d) 1500

Notice that the Cash account now shows three transactions: the initial investment by the owner (a), the cash purchase of equipment (b), and the cash purchase of supplies (d).

RECORDING PAYMENT TO A CREDITOR

The business paid $2,500 to North Shore Office Supply to apply against the debt of $6,000 shown in Accounts Payable.

a. The asset account, Cash, is decreased by $2,500.
b. The liability account, Accounts Payable, is decreased by $2,500.

Accounts Payable

–

+

(e) 2500

(c) 6000

Cash

+

–

(a) 100000

(b) 5000
(d) 1500
(e) 2500

Recording Pre-Paid Rent

The business was required to pay rent in advance. You set up an asset account called Prepaid Rent.

a. The asset account, Prepaid Rent, is increased by $8,000.
b. The asset account, Cash, is decreased by $8,000.

Prepaid Rent

–

+

(f) 8000

Cash

+

–

(a) 100000

(b) 5000
(d) 1500
(e) 2500
(f) 8000

Account Balances
An account balance is the difference between the amounts on the two sides of the ‘T’ account. First add the figures on each side of the ‘T’ account. Then subtract the smaller total from the larger total with the result being the account balance. If the total on the right side is larger than the total on the left then the balance is recorded on the right side. If the total on the left side is larger, the balance is recorded on the left side. This is true even if there is only one entry.

Your Successful Business

Balance Sheet

December 31, 2020

Assets

Liabilities

Cash

83000

Accounts Payable

3500

Supplies

1500

Prepaid Rent

8000

Owner’s Equity

Equipment

11000

Carolyn Wells, Capital

100000

Total Assets

103500

Total Liabilities and Owner’s Equity

103500

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