Retained earnings
The cumulative net profit a business has kept — not paid out to owners — since it began. An equity account on the balance sheet that each year’s profit rolls into.
What retained earnings means.
Retained earnings is the running total of all the net profit a business has earned and kept — rather than distributed to its owners — since it started. It is an equity account on the balance sheet, part of what the business is worth to its owners.
At the end of each fiscal year, the period’s net income (from the P&L) closes into retained earnings, and the P&L resets to zero for the new year. QuickBooks does this roll-forward automatically.
A wrong retained-earnings balance is a red flag.
Because retained earnings accumulates every year’s result, errors compound there: a prior-period correction posted to the wrong place, owner draws miscategorized as expenses, or a botched year-end close can leave retained earnings wrong — and since it carries forward forever, the error follows the books indefinitely until found.
An unexplained or moving retained-earnings balance is a classic signal the books need a cleanup, because it usually means prior periods weren’t closed cleanly.
Where retained earnings sit on a tax return.
The return
A corporation's return carries the same figure twice: Form 1120 has a balance sheet (Schedule L) with retained earnings lines, and Schedule M-2 reconciles retained earnings per the books. An S corporation's Form 1120-S has its own Schedule M-2. See the Instructions for Form 1120. Your CPA or EA prepares them from the books, which is why the books' retained earnings has to be right.
Not every business has the account
Retained earnings belongs to corporations. A sole proprietorship or a partnership keeps owner's equity and owner draws instead.
Retained earnings in QuickBooks: a worked example.
Illustrative figures, not a client file.
- 01
The year
A corporation starts the year with retained earnings of $85,000. It earns $42,000 and pays out $15,000 in dividends or distributions.
- 02
The roll-forward
$85,000 + $42,000 − $15,000 = $112,000. The $42,000 of net income closes into retained earnings at the year-end; the distributions are recorded in their own equity account and come out of the same balance.
- 03
What QuickBooks does
QuickBooks Online maintains the Retained Earnings account itself and rolls the year's net income into it, which is why a change to a closed year changes retained earnings.
How retained earnings goes wrong in QuickBooks.
A correction posted straight to retained earnings
It makes the balance agree and hides what was wrong. The correction belongs in the account that was misstated, in the period it belongs to.
Owner draws or distributions booked as expenses
Profit is understated and the distribution never reduces equity, so retained earnings drifts from the real figure.
Edits to a closed year
With no closing date set, an entry dated in a closed year moves every later balance. Retained earnings changed for a closed year traces how that happens.
Fixed
Tracing a drifting balance back through each close is bookkeeping cleanup; keeping it from drifting again is monthly bookkeeping.
Retained earnings that don’t make sense?
A QuickBooks ProAdvisor traces the balance back through your closes and corrections to find why it’s off — written fixed-fee scope.
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