S Corp bookkeeping can differ from the usual record-keeping for your average business. Corporations have different structures and follow different rules.
In this post, we’ll talk about the books you need for proper S Corp financial management and taxation. We’ll also go over some tips to stay ahead and out of trouble.
Understanding S Corp Bookkeeping
Choosing the Right Accounting Method: Cash vs. Accrual
Using accrual accounting vs cash accounting is important when dealing with S corp bookkeeping. The main difference between the two boils down to when you record revenue and expenses. Here’s how you judge which method is the right fit for your S corp.
Cash Basis Criteria
Cash basis can simplify bookkeeping in the initial stages of a business. If you are a startup or small business with straightforward transactions and low inventory levels, cash accounting works well. It can also benefit businesses that primarily focus on managing cash flow.
Accrual Basis Criteria
S corporations with a significant amount of credit sales and purchases on account should consider accrual accounting. This method also provides businesses a more comprehensive view of their financial performance as they grow.
If you aim to secure loans or attract investors, accrual basis accounting makes your business more attractive.
Hybrid Cash / Accrual
Some S corps might use a modified approach, using accrual accounting for specific areas like inventory, and cash accounting for others.
S corp bookkeeping can generally be either cash or accrual accounting if annual gross receipts stay under $25 million. The IRS does note exceptions, however, so we recommend consulting a tax advisor to see what the IRS will allow.
Note also that the method you choose can affect your taxes since it influences when you report income and expenses.
Key Bookkeeping Tasks for S Corps
Recording Transactions
- Develop a system for collecting and storing receipts, invoices, and other transaction-related documentation.
- Maintain accurate records using a consistent system for categorizing and tracking transactions.
- Track all income, including revenue from sales, interest earned, service fees, and other business income.
- Track all business-related expenses, like rent, utilities, salaries, subscriptions, and supplies.
Managing Financial Records
- Implement internal controls to safeguard financial data.
- Maintain an accurate general ledger of all financial accounts, including assets, liabilities, and equity on top of revenue and expenses.
- Manage accounts payable and receivable, effectively tracking outstanding invoices and payments to maintain healthy cash flow.
- Reconcile bank statements on a schedule to identify and correct discrepancies quickly.
- Prepare income statements, balance sheets, and cash flow statements on a schedule to track financial health.
Ensuring Tax Compliance
- Ensure proper withholding taxes and timely payment of payroll taxes.
- Correctly estimate and pay taxes throughout the year to avoid penalties from the IRS.
- Keep detailed records of all tax-related information, including deductions and payroll taxes.
- Stay updated on changes in tax regulations.
Managing S Corp Finances
Revenue and Expense Management
Below are some strategies for managing and categorizing S corp revenues and expenses to streamline financial operations.
Revenue Management
- Clearly define all the ways your S corporation generates income, like sales of products or services, interest on investments, and royalties.
- Create separate accounts for each revenue source to track and analyze income stream performance more easily.
- Use a customer relationship management (CRM) system to track customer data and sales activity to identify trends and optimize sales efforts.
Expense Management
- Create a standardized chart of accounts to accurately classify expenses like rent, utilities, salaries, marketing, office supplies, and travel.
- Break down broader categories like marketing into subcategories. You can add advertising, social media campaigns, and branding events, for example, for a more granular view of spending patterns.
- Use expense tracking tools to capture receipts electronically, error-proofing data entry and reducing the risk of losing documentation.
- Integrate your business credit card with your accounting software to automatically import transactions, too.
Streamlining Operations
- Regularly reconcile bank statements and credit card statements with S corp bookkeeping records to ensure accuracy and address any discrepancies.
- Use accounting software with features like automatic bank feeds to automate repetitive tasks.
- Consider using cloud-based accounting software to allow real-time remote access and collaboration as well as data backup and security.
- Regularly generate reports to monitor income, expenses, and profitability, and analyze areas for cost reduction or revenue growth.
Asset and Liability Tracking
Below are some tips for effective asset and liability tracking using bookkeeping software.
Asset and Liability Accounts
- Separate fixed assets with a long useful life and current assets readily convertible to cash.
- Separate long-term debt and current liabilities due within a year.
- Describe each asset and liability account in detail to easily identify specific assets and liabilities.
Asset Additions and Disposals
- Maintain detailed documentation for asset purchases to help with depreciation calculations and future disposal.
- Create a depreciation schedule for fixed assets that automatically calculates depreciation expenses over their useful life to ensure accurate statements.
- Record the disposal of assets with complete details on sale price, date, and any gain or loss on disposal.
Liability Management
- Track outstanding bills from vendors and expenses incurred but not yet invoiced.
- Set up separate accounts for each loan and record principal amounts, interest rates, and payment schedules for easy reconciliation.
Frequently Asked Questions
What are the most common bookkeeping mistakes made by S corporations?
S corporations, like many small businesses, can fall prey to the mistake of mixing personal and business finances. They also often fail to keep all receipts and records of income and expenses.
Improperly classifying employees and independent contractors or freelancers is another common mistake. The IRS has specific guidelines for this because it has tax implications. Misclassifying hires can lead to penalties and fines.
S corporation owners who also work for the business are also employees, subject to payroll taxes. Forgetting this means skipping tax withholding and payment, which will be penalized.
S corporations can also fail to follow the specific rules that apply regarding shareholder distributions, leading to more tax issues.
How frequently should financial audits be conducted for S corporations?
The IRS does not have a mandatory audit frequency for S corporations like it does for publicly traded companies. You might want to conduct an audit based on the following factors, however:
- Significant revenue and complex financial structure.
- Lack of strong internal controls that ensure accurate financial reporting.
- Low tolerance for potential financial risks.
- Lender or investor requirements as a condition for a loan or investment.
- Concerns around potential fraudulent activity.
We recommend that S corps do an audit every three years just to make sure everything is clean. If you are getting into a merger, acquisition, or IPO, you can do an additional audit.
What are the signs that an S corporation should switch from in-house financial management to bookkeeping outsourcing?
Switching from in-house bookkeeping to outsourced services can be beneficial when:
- The volume and complexity of financial transactions threatens to overwhelm internal resources.
- You face new accounting challenges from entering new markets, adding product lines, or opening international operations.
- Your inventory needs are growing and need specialized bookkeeping expertise.
- In-house bookkeeping costs can get out of control with business growth, while outsourcing allows you to scale up or down.
How can S corporations minimize their tax liability through effective bookkeeping?
Effective bookkeeping can help minimize your tax liability by maximizing legitimate tax deductions. Just don’t over inflate things like the S corp owner’s salary, or it might get flagged by the IRS.
S corporations can distribute profits as a combination of salary and dividends. Dividends are not subject to payroll taxes. Timely tax return filing and accurate records help you to avoid penalties and interest charges from the IRS.
Proper tracking of depreciable assets allows you to deduct a portion of the asset’s cost over its useful life, reducing taxable income. Proper inventory management practices can also optimize cost of goods sold (COGS), reducing taxable income.
What steps should be taken if discrepancies are found during financial statement preparation?
If you spot discrepancies during financial statement preparation, trace the source and identify where things went wrong. Then, correct the error.
Consider whether the error is significant enough to harm investor or creditor confidence, for example. If it is, you might need to disclose the error and its correction in the footnotes of your financial statements for transparency. Consider consulting with a qualified accountant or auditor.
Make sure you document the entire process of investigation and the corrective actions you took. Take steps to prevent similar discrepancies in the future.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
S Corp bookkeeping doesn’t have to be daunting if you understand the basics and use the right system. Better yet, outsource your bookkeeping to a reliable partner to get rid of that headache altogether.
