S Corporation

• An S corporation is a company that elects to operate in accordance with Subchapter S of Chapter 1 of the Internal Revenue Code. The Internal Revenue Service grants tax exemption to the business and enables it to pass its income on to its shareholders, who then pay taxes at the personal level. An S corporation cannot have more than 100 shareholders. Besides these legal minutiae, an S corporation records accounting entries similar to other businesses.
  
  

Capitalizing Versus Expensing

• In accounting terminology, expensing means recording a cost as a direct reduction to corporate income. Capitalizing means converting a cost into an asset, primarily because a company expects to derive long-term benefits from the expenditure. In this case, accountants treat the charge as if it were an asset and report it in the statement of financial condition. Capital expenses, are by definition, long-term resources because the business expects to benefit from them over a period that exceeds one year.
  
  

Long-Term Assets

• Capital assets are also known as long-term resources, tangible items or fixed assets. They run the gamut from equipment and production machinery to factories, computer hardware, commercial buildings and residential establishments. In contrast, intangible assets -- such as patents and trademarks -- lack physical substance. Automobiles and other motorized vehicles -- such as bulldozers -- also represent long-term resources.
  
  

Accounting

• Now that you understand the difference between expensing and capitalizing and can categorize cars in an S corporation's balance sheet, it's easier to record the transaction. To record a car purchase, a company's bookkeeper posts the following entries: debit the "property, plant and equipment" account; credit the cash account and the notes payable account. There's a debt account in these entries because a purchase featuring a down payment implicitly calls for a loan or lender finance scheme to cover the unpaid portion of the asset. Crediting cash, an asset account, means reducing cash in the organization's vaults; it's distinct from the banking terminology.
  
  

Financial Reporting

• An S corporation does not deduct a car's down payment as an expense; it records it as an asset. However, it depreciates the automobile over a specific period -- say, five or 10 years. The business records depreciation expense in its statement of profit and loss. The entry to record depreciation is as follows: debit the depreciation expense account and credit the accumulated depreciation account.