USA Historical Adjustment


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I just started doing the books for a new client of mine who has an existing business but did not have a set of books in prior years. When I entered cash, the entry the software made was a debit to cash and a credit to historical adjustments, which is a liability on the books. I know it should not be a liability but I am not sure where or what it should be.
 
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That's a very interesting problem. Is the client's company a sole proprietorship, partnership or some kind of corporation?

Instead of crossing the Cash DR entry to Historical Adjustments CR, what if you crossed it to some appropriate capital account, like Contributed Capital? Then you could add each asset and liability similarly till the balance sheet is filled out with Retained Earnings set to zero (as if the firm were just set up), and then go forward from there, maybe? I'm spitballing, so this may not be entirely cricket.
 
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That's a very interesting problem. Is the client's company a sole proprietorship, partnership or some kind of corporation?

Instead of crossing the Cash DR entry to Historical Adjustments CR, what if you crossed it to some appropriate capital account, like Contributed Capital? Then you could add each asset and liability similarly till the balance sheet is filled out with Retained Earnings set to zero (as if the firm were just set up), and then go forward from there, maybe? I'm spitballing, so this may not be entirely cricket.
They are a S-Corp with husband and wife as 50/50 owners. I was thinking to book the credit amount to owners equity but I am not 100% sure if this is correct. I like the suggestion to book to contributed capital, which is the same as owners equity, right?
 
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They are a S-Corp with husband and wife as 50/50 owners. I was thinking to book the credit amount to owners equity but I am not 100% sure if this is correct. I like the suggestion to book to contributed capital, which is the same as owners equity, right?
I don't know that it's correct, but I don't know that it's wrong, either. I can't think of any rules that prescribe how to do this; there may not be any. From the sound of it, you've gone from the "science of accounting" into the "art of accounting" region.

Yes, an account like Contributed Capital (or whatever appropriate title you want to give it) would be set up as an owner's equity account. The point would be to use it as a holding tank for the total net difference between assets and liabilities. From your description, you don't really have a way to split out anything into Retained Earnings in a way that isn't purely arbitrary.

Since the husband and wife own all the residual interest jointly and severally, you probably can't use separate capital accounts for each of them. That would make it look like a partnership rather than an S corp.

The only wrinkle that comes to mind would come from tax reporting--booking deferred tax assets and liabilities on their GAAP books, and NOL carryforwards on future tax returns. But if you're starting the GAAP books from zero, I suppose you have to assume no NOL carryforwards and no DTAs/DTLs as of the opening balance sheet date.
 

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