Tracking retained earnings is critical, yet most QuickBooks users struggle to calculate it properly.
Luckily, with this complete guide you'll master retained earnings in QuickBooks through simple, step-by-step instructions.
You'll discover the exact formula for calculating retained earnings, learn the difference between net income and retained earnings, see how to set up tracking properly, and more.By the end, you'll be a retained earnings expert in QuickBooks.
Introduction to Calculating Retained Earnings in QuickBooks
Retained earnings refer to the profits that a company decides to keep rather than distribute as dividends to shareholders. Tracking retained earnings is important for monitoring business profitability over time and making sound financial decisions.
This guide will explain how to:
- Set up retained earnings tracking in QuickBooks
- Make adjusting entries to update retained earnings
- Calculate retained earnings at year end
By the end, you'll have a better understanding of what retained earnings are and how to leverage QuickBooks' tools to monitor this important financial metric.
Understanding Retained Earnings in QuickBooks
Retained earnings represent the profits that a company reinvests into itself rather than paying out to shareholders. Specifically, it's the portion of net income that is retained by the corporation rather than distributed as dividends. Tracking retained earnings shows profits kept in the business over its lifetime.
In QuickBooks, retained earnings are recorded under the Equity section of the Chart of Accounts. The account allows you to monitor cumulative business profits over time.
The Importance of Retained Earnings in Financial Reporting
Monitoring retained earnings is critical for evaluating business profitability trends and making decisions about things like future investments, debt payments, dividends payouts, and more.
Analyzing changes in retained earnings from period to period provides insight into sales growth, cost management, tax efficiency, and overall performance. Business owners and investors can use this metric to assess the company's financial health.
Navigating This Guide to Retained Earnings in QuickBooks
In this guide, you'll learn step-by-step how to:
- Set up a Retained Earnings account in QuickBooks
- Record adjusting entries to update the account balance
- Calculate retained earnings at year end using QuickBooks reports
You'll also find tips for tracking and analyzing retained earnings over time to inform smart business decisions.
By the end, you'll be well-versed in leveraging QuickBooks to monitor this critical financial metric.
What is the formula for calculating retained earnings?
The formula for calculating retained earnings is:
Retained Earnings = Beginning Retained Earnings + Net Income/Loss - Dividends
Where:
- Beginning Retained Earnings: The retained earnings balance from the previous accounting period
- Net Income/Loss: The net profit or net loss generated during the current accounting period
- Dividends: Any dividends paid to shareholders during the current accounting period
For example, if last year a company had $100,000 in retained earnings, made $50,000 in net income this year, and paid out $10,000 in dividends, the retained earnings calculation would be:
Retained Earnings = $100,000 + $50,000 - $10,000
= $140,000
So the retained earnings for the current year would be $140,000.
This formula can be applied in both QuickBooks Online and QuickBooks Desktop to calculate the balance in the Retained Earnings equity account over time. It is an important measure of the cumulative profitability of a company over its history.
The retained earnings balance essentially represents a company's total net income since inception, minus any dividends paid to shareholders over time. Tracking it enables financial analysis of profit trends, dividend history, etc.
What is the difference between net income and retained earnings in QuickBooks?
Net income is the profit a company earns during an accounting period, after deducting all expenses from total revenue. It represents the amount left over after a company pays its operating expenses and taxes.
Retained earnings refer to the cumulative net income a company has earned since its inception, minus dividends paid to shareholders. It is the portion of net income that is retained by the company rather than distributed to shareholders.
In short:
- Net income is the profit earned in a single accounting period. It appears on the income statement.
- Retained earnings represent the total profit earned over the lifetime of a company after dividends are paid out. It appears as a line item on the balance sheet under the shareholders' equity section.
When a company generates a net profit, the net income amount is transferred to the retained earnings account at the end of the accounting period. The retained earnings balance therefore increases by the net income amount.
If dividends are paid to shareholders, this reduces the amount of retained earnings. Companies may also make adjustments to correct errors in prior years, which can increase or decrease retained earnings.
In QuickBooks, net income flows into retained earnings automatically. You can view the retained earnings balance on the balance sheet and make adjustments as needed in the equity section. Monitoring changes to retained earnings each period helps track profitability over time.
What is the entry for retained earnings?
Retained earnings is a credit balance account that reflects the accumulated profits and losses of a company since its inception. It increases with a credit entry when the company earns net income, and decreases with a debit entry when the company incurs net losses or distributes dividends.
In QuickBooks, retained earnings is tracked with a balance sheet account. When setting up your QuickBooks chart of accounts, add a "Retained Earnings" account under the Equity section. This account will automatically update each time net income or net loss is recorded.
For example, if your company earns $100,000 in net income for the year, QuickBooks will automatically credit the Retained Earnings account by $100,000. If you then pay out $50,000 in shareholder dividends, QuickBooks will debit the Retained Earnings account by $50,000, leaving an ending balance of $50,000.
So in summary:
- Retained Earnings is a credit balance equity account that tracks accumulated profits and losses over time
- It increases with a credit entry when net income is earned
- It decreases with a debit entry when net losses are incurred or dividends are distributed
- In QuickBooks, the Retained Earnings account automatically updates with each closing entry
Using this QuickBooks account enables you to easily track and report on your company's retained earnings over time.
How do you reconcile retained earnings?
To reconcile retained earnings, you will need to follow these key steps:
-
Identify the beginning retained earnings balance from the prior period's balance sheet. This is the starting point for your reconciliation.
-
Add or subtract the net income or net loss from the current period's income statement. A net profit will increase retained earnings, while a net loss will decrease retained earnings.
-
Subtract any dividends paid to shareholders during the current period. Dividend payments reduce the amount of retained earnings.
-
Make any necessary prior period adjustments, such as corrections of errors from previous years. These adjustments will impact the beginning retained earnings balance.
-
The resulting balance after making these adjustments is the ending retained earnings balance that will carry forward to the next accounting period.
To complete the reconciliation, you will transfer the ending retained earnings balance to the balance sheet as a line item under the equity section. Reconciling retained earnings ensures the accuracy of your financial statements and allows you to properly account for profits held for reinvestment in the business over time. Let me know if you need any clarification or have additional questions!
sbb-itb-beb59a9
Setting Up Retained Earnings Tracking in QuickBooks
Initializing Retained Earnings Tracking Feature
To start tracking retained earnings in QuickBooks, first navigate to the Company menu and click Preferences. Under the Accounting category, tick the box next to "Track retained earnings" and save your changes. This enables QuickBooks to automatically calculate and update your retained earnings balance based on activity in equity accounts like owner's equity, owner's draw, and net income.
Configuring Equity Accounts for Retained Earnings
Once retained earnings tracking is enabled, you need to verify that equity accounts are properly configured. Under the Chart of Accounts, ensure accounts like Owner's Equity and Owner's Draw are enabled as equity accounts. QuickBooks sums the balances across equity accounts to derive retained earnings. Appropriately categorizing them is crucial for accurate reporting.
You can also link a specific Retained Earnings account to track the balance. Under Equity, create a Retained Earnings account. With the "Track retained earnings" preference enabled, QuickBooks will automatically update the account balance at the end of each period.
Establishing Opening Retained Earnings Balance
To ensure accurate retained earnings tracking from the start, enter the correct beginning retained earnings balance. Refer to your historical financial statements to find this figure. Then under Retained Earnings account, enter the balance through an adjusting journal entry dated as of the first day of your QuickBooks company file.
With the above steps completed, QuickBooks will now automatically calculate your retained earnings based on the activity in linked equity accounts. You can view the updated amount in the Retained Earnings account at any time.
Understanding Retained Earnings in QuickBooks Online
Retained earnings in QuickBooks Online refers to the accumulated net income that is retained by a business over its operating life, rather than being paid out as dividends. It is an equity account that tracks the profits retained for reinvestment back into the business.
What Type of Account is Retained Earnings in QuickBooks Online
In QuickBooks Online, retained earnings is classified as an equity account. Equity accounts record the claims held by a business's owners or shareholders based on their investment into the company. Retained earnings specifically represents the cumulative profits earned by a business that have not been distributed.
As an equity account, retained earnings appears in the equity section of the balance sheet in QuickBooks Online. It is increased by net income or decreased by net losses and dividend payouts over time. The running total reflects profits retained from inception.
Calculating Retained Earnings in QuickBooks Online
QuickBooks Online automatically calculates retained earnings based on your income statement activity. Specifically, it takes the beginning retained earnings balance, adds net income (or subtracts net loss) for the current period, and subtracts any dividend payments made to investors.
The calculation is:
Beginning Retained Earnings
+ Net Income (Loss) for the Current Period
- Dividends Paid
= Ending Retained Earnings
To view your business's retained earnings balance in QuickBooks Online, navigate to the Balance Sheet report. The total can be found in the Equity section, under the account named "Retained Earnings." Monitoring this over time shows the profits your business has earned and retained internally over its lifetime.
Recording Retained Earnings Changes in QuickBooks
Retained earnings represent a company's cumulative net income or losses over its operating history. As the business operates, transactions impacting net income also affect retained earnings. It's important to understand and properly record various events that change this equity account balance in QuickBooks.
Impact of Net Income on Retained Earnings
At the end of each fiscal year, net income (or net loss) for the period directly flows into retained earnings. Positive net income increases retained earnings, while net losses decrease the account.
For example, if a company generated $100,000 in net income last year according to its income statement, its retained earnings balance would increase by the same $100,000. Recording this is simple in QuickBooks - the software automatically transfers the full-year net income amount to retained earnings during closing.
The Effect of Dividend Payments on Retained Earnings
When a company pays dividends to shareholders from its profits, this reduces the amount of retained earnings. Specifically, the dividend payments are debited to retained earnings.
For instance, if a company pays $50,000 in shareholder dividends, its retained earnings would decline by the $50,000 that is distributed. In QuickBooks, you would record this with a journal entry debiting retained earnings and crediting cash for the payment.
Adjusting Retained Earnings for Prior Period Adjustments
In some cases, companies must correct an error from a previous year related to timing differences, accounting estimate changes, or income statement misstatements. These prior period adjustments require a corresponding adjustment to retained earnings.
For example, say net income last year was overstated by $20,000 due to a revenue recognition error. To fix this in the current year, you would debit retained earnings for the $20,000 and credit an income statement account like revenue or expenses. This update ensures accuracy of the financial statements going forward. QuickBooks allows a direct modifying entry to retained earnings for these corrections.
Adjusting Retained Earnings in QuickBooks Desktop
Retained earnings represent a company's accumulated net income over its history. In QuickBooks Desktop, the retained earnings account tracks this cumulative profit to provide insight into the business's financial performance. However, situations may arise that require manually adjusting the retained earnings balance outside of regular transactions.
Creating Adjusting Journal Entries in QuickBooks Desktop
If a prior period adjustment is needed to correct an error in previously reported financial statements, you can create a journal entry to directly modify the retained earnings account. For example:
- Debit Retained Earnings account for any understated expenses or overstated revenues needing correction from a previous period.
- Credit Retained Earnings account for any overstated expenses or understated revenues needing correction.
This will allow you to adjust the cumulative net profit without impacting the current period's income statement.
Be sure to include a memo detailing the reason and amounts for the adjustment. This will help trace the change when reviewing retained earnings in financial reports.
Editing Beginning Retained Earnings Balance in QuickBooks Desktop
When closing the books at year end, QuickBooks rolls the retained earnings balance into the next fiscal year. If you need to modify the beginning retained earnings balance for the new year, you can manually edit it:
- Make sure you have already completed closing procedures for the previous year as the last step in your accounting cycle. This rolls the retained earnings amount into the new year.
- Go to Lists > Chart of Accounts and select the Retained Earnings account register.
- Enter the new beginning balance in the first line of the register for the current fiscal period.
Doing this before recording any new transactions will correctly reset the cumulative retained earnings amount carried over from the previous year.
Troubleshooting Retained Earnings Variations in QuickBooks Desktop
If unexplained changes occur in the retained earnings account, trace the amounts to find the source transactions:
- Carefully audit adjusting journal entries posted to retained earnings. Review the memo details on each.
- Check the account register for any beginning balance modifications as the new fiscal year begins.
- Review transactions in previous years by running a retained earnings report with transaction details to identify activities causing shifts over time.
Thoroughly investigating irregular retained earnings amounts will help locate the transactions or entries responsible for the change. This facilitates accurate financial reporting.
Best Practices for Managing Retained Earnings in QuickBooks
Regular Reconciliation of Retained Earnings
It is important to reconcile the retained earnings account in QuickBooks on a regular basis, such as monthly or quarterly. Here are some tips:
-
Run a retained earnings report in QuickBooks and compare the balance to your records such as financial statements. Investigate any discrepancies.
-
Review transactions that affected retained earnings, including net income/loss, dividends paid, prior period adjustments, or corrections of errors. Verify they were recorded properly.
-
Trace retained earnings balances from prior periods to ensure the carryover amount is accurate.
-
Consider adjusting journal entries if needed to true up the retained earnings account.
Regularly reconciling will help ensure your retained earnings account is up-to-date and accurate.
Annual Analysis of Retained Earnings Trends
Analyzing year-over-year retained earnings trends is important for assessing your business's profitability. Here are some tips:
-
Run a retained earnings report for the most recent year and compare to prior years. Calculate the dollar and percentage change.
-
Review annual net income/loss amounts compared to dividends paid to analyze profitability drivers.
-
Compare retained earnings balances to assets/equity over time to gauge financial strength.
-
Set benchmarks for expected increases in retained earnings based on business plans and growth targets.
-
Flag any unusual variances year-over-year for further investigation.
Analyzing trends over time can reveal important insights into your business's financial health and profitability.
Setting Benchmarks for Optimal Retained Earnings
Setting optimal retained earnings levels allows you to measure performance against business growth plans. Consider these tips when establishing benchmarks:
-
Evaluate funding needs for operations, expansion plans, debt payments or other outflows. Model various scenarios.
-
Consider industry standards for retained earnings levels relative to assets/equity.
-
Set specific monetary targets for retained earnings balances over 3-5 year timeframes.
-
Establish ratios for year-over-year retained earnings increases as a percentage of net income.
-
Routinely compare actual retained earnings to benchmarks to identify shortfalls or excesses.
Establishing optimal retained earnings goals and metrics allows you to gauge business performance against key financial growth objectives.
Conclusion and Next Steps for Retained Earnings Management
Summarizing Key Insights on Retained Earnings Calculation
Retained earnings are an important component of financial reporting that track a company's cumulative net earnings since inception. By regularly calculating retained earnings in QuickBooks, businesses can closely monitor their profitability over time.
The key takeaways around calculating retained earnings in QuickBooks include:
- Retained earnings are calculated by taking the beginning retained earnings balance, adding net income for the period, and subtracting dividends paid to shareholders. This updates the cumulative earnings figure.
- In QuickBooks Online, retained earnings are tracked automatically with each closing entry. The balance sheet shows the updated amount.
- In QuickBooks Desktop, a journal entry adjusts the retained earnings account at the end of each period when closing entries are made.
- Following the steps outlined in this guide will ensure your QuickBooks retained earnings balance is always up-to-date.
Additional Support for Retained Earnings in QuickBooks
For further assistance with retained earnings in QuickBooks, check out these helpful resources:
-
The QuickBooks Community Forum features an active discussion board where users and experts answer platform questions. Search for retained earnings topics or post any issues you encounter.
-
The QuickBooks Help Center contains guides, troubleshooting tips, and contact options for getting support directly from Intuit's customer service team.
Furthering Your Expertise in QuickBooks Accounting
To build on your QuickBooks skills, consider reading through these additional accounting guides focused on key small business financial processes:
- QuickBooks Guide to Accounts Receivable and Accounts Payable
- How to Reconcile Bank Accounts in QuickBooks
- Setting Up Inventory Management in QuickBooks
Following best practices in these critical areas will lead to greater accounting efficiency and financial control across your organization.
