What Is an S Corp Chart of Accounts?

An S corp chart of accounts refers to a listing of every account used in an S corporation's general ledger. An S corporation is an entity that passes its earnings and losses through to the personal income tax returns of its shareholders. Since it provides tax information for each of its shareholders, it must have a complete and accurate chart of accounts.  

Understanding S Corporation Accounting

While a C corporation must pay corporate taxes, an S corporation is considered a disregarded entity. This means that it pays taxes on its earnings through its shareholders and at an individual level. It is important for an S corp to maintain accurate and detailed records of its earnings, expenses, and capital investments. In addition, it also must keep accurate records of its shareholders' cash or property investments. Such records are essential for determining the percentage of ownership each shareholder holds in the company.

Income and Expense Accounting

S corporation accounting is generally similar to C corporation accounting. An S corp's income and expenses and the nature of different kinds of income and expenses will be reported at the company level. It does not have to use accrual accounting. It can also use cash accounting or hybrid accounting if those methods are more suitable. The characteristics of income and expense items will remain the same when they pass through to the shareholders. For that reason, an S corporation must identify different kinds of income and expenses for the benefit of its shareholders.

How an S Corp Can Optimize Its Chart of Accounts

In an accounting system, a chart of accounts serves as a table of contents that provides a listing of all the accounts in a company, as well as their code numbers. Basically, it consists of five different types of accounts:

  • Asset
  • Equity
  • Liability
  • Revenue
  • Expense

When a company is creating financial statements, it is essential that it matches the accounts to the right financial report. If it fails to set up and use its accounts correctly, it will have inaccurate or confusing financial statements. The asset, equity, and liability accounts are for generating balance sheets, while revenue and expense accounts are for creating income statements.

Asset Accounts

Asset accounts refer to records that show what an S corporation owns. There are two kinds of asset accounts: current asset accounts and fixed asset accounts. Current asset accounts record assets that can be turned into cash within a year. Examples of current assets include checking and savings accounts with a bank, accounts receivable, and inventory.

Fixed asset accounts, on the other hand, record assets that will not be resold. Examples include equipment, buildings, vehicles, office furniture, and computers. Such assets are considered fixed assets rather than expenses when they are bought. Their initial costs can be gradually expensed over time as they depreciate during their useful lives.

Liability Accounts

Liability accounts are accounts that record what a company owes. There are two kinds of liability accounts: current liability accounts and long-term liability accounts. Current liability accounts keep track of liabilities that must be paid off within a year. Such liabilities include amounts owed to suppliers, sales and payroll taxes owed to the government, and short-term loans. Long-term liabilities are liabilities that a business can take more than a year to pay off. They include capital leases, mortgages, and long-term bank loans.

Equity Accounts

Equity accounts record the net worth of a company, which is determined by subtracting liabilities from assets. Businesses of different legal structures have different equity accounts. While an S corp and a C corp may sometimes have the same type of equity accounts, their definitions of the accounts may be different because of the different ways they treat taxes.

Revenue Accounts

Revenue accounts record the income that a company generates by selling its products or services. Examples of items found in revenue accounts include sales revenue, commissions, income from services, and professional fees.

Expense Accounts

Expense accounts show the costs that are incurred in running a business. There are basically two types of expense accounts: direct expense accounts and indirect expense accounts. Direct expenses refer to expenses that are directly related to generating income from a product, project, or job. Indirect expenses, on the other hand, are overhead costs that are not directly related to producing income, such as payroll, rent, and office supplies expenses.

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