Retained Earnings Versus the Accumulated Adjustments Account
If we look a very basic S Corp owner’s equity including both the Common Stock and the AAA, it would look something like the diagram here. In order for you to understand all the elements of this diagram, before you continue reading, please download the Retained Earnings Chart from our Media Gallery.
Now that you've printed out your Retained Earning Chart example and have it in front of you, always keep in mind that the AAA account should be treated as you would your checking balance register. The AAA account simply keeps track of profits, losses and equal dividends paid to all shareholders. The Common Stock only measures each stockholder’s equity in the business. To find out if you will pay tax with an S Corporation, which will be passed to your K-1 for your personal tax return, the ending balance (profit or loss) of the AAA account is taxable to all shareholders based on percentage of stock owned. Here the $18,000 would be the profit of the S Corp and the common stock would be calculated at $7,000 plus the suspended $25,000 for a beginning balance for the new tax year of $30,000.
Because the $25,000 gain is offset by the $17,000 suspended loss, the pass-through S Corporation income is $18,000, which is split between each shareholder. When the next accounting year begins, say, January 1, 2010, the AAA account will sit at $18,000 and the Common Stock will be $30,000. Adjustments to common stock can also be made via cash contributions by any stockholder or equipment with a purchase price according to IRS guidelines for an S corporation that are allowed deemed as capital contributions.