S-Corp Accounting Tutorial

An S-Corp can use several methods of accounting for corporate income.
An S-Corp can use several methods of accounting for corporate income. (Image: tax forms image by Chad McDermott from Fotolia.com)

S corporations are companies that share profits, losses and credit through the shareholders. In this manner, the shareholders use tax purposes to report income and losses on personal tax returns concerning the S-Corp, allowing the company to avoid double taxation. A company has to be a domestic corporation with fewer than 100 shareholders and have only one class of stock to be considered an S-Corp. S-Corps use certain accounting methods for bookkeeping and records. This accounting procedure includes a cash method or an accrual method during a specified reported tax year.

Decide on the appropriate tax year in which to report income. Select a tax year ending on Dec. 31, an ownership tax year, a natural business year or any other tax year where the corporation was established as a business. You can also choose a tax year other than a permitted year, as long as the deferred period is not longer than the shorter of three months.

Choose the method of accounting used regularly in maintaining the S-Corp's records. Apply a cash method if you produce, sell or purchase merchandise. Keep an inventory while using an accrual method for merchandise sales and purchases. Calculate the gross income as all the income you constructively or actually receive during the selected tax year. Indicate the fair market value of income concerning any property or services you had received. Deduct expenses based on the actual tax year when you pay them. Include business expenses that you contest liability for as an expense.

Report income earned and deduct or capitalize expenses in the incurred year when using an accrual method. This procedure matches income and expenses in the corrected year. Count the amount as gross income you estimate to occur during the tax year and with reasonable accuracy. Record the income amount on the earliest of dates such as receiving the payment, when the income amount is due, whenever you earn the income or when the title has passed. For estimated income that is different than the exact amount of gross income, account for the difference during the tax year when you make your determination of the different gross income amount.

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