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If Acme, a corporation with a few individual shareholders, purchases, receives, and pays for new inventory with income earned earlier in the same year, the inventory account will increase by the cost to bring that inventory into stock. On Acme's balance sheet, this is reflected by an increase of in Form 1065, Schedule L, line 3: Inventories.
But, to balance the balance sheet, what other account needs to be adjusted? An account within liabilities cannot be increased since the inventory has already been paid for. Another account within assets cannot be adjusted since the income used to purchase the inventory was earned in the same year, so did not exist as cash on the balance sheet of the previous year.
So, does shareholders' equity need to be increased? I would think so, since the income used to purchase the inventory would otherwise have gone to the shareholders. If my reasoning is correct, does the balancing increase occur in Form 1065, Schedule M-2, line 2: Capital contributed, cash? This would increase Form 1065, Schedule L, line 21, Partner's capital accounts. Is this correct?
Thanks!
But, to balance the balance sheet, what other account needs to be adjusted? An account within liabilities cannot be increased since the inventory has already been paid for. Another account within assets cannot be adjusted since the income used to purchase the inventory was earned in the same year, so did not exist as cash on the balance sheet of the previous year.
So, does shareholders' equity need to be increased? I would think so, since the income used to purchase the inventory would otherwise have gone to the shareholders. If my reasoning is correct, does the balancing increase occur in Form 1065, Schedule M-2, line 2: Capital contributed, cash? This would increase Form 1065, Schedule L, line 21, Partner's capital accounts. Is this correct?
Thanks!