QuickBooks Retained Earnings

The swap you never see

On the last day of your fiscal year, the Balance Sheet shows the year’s profit on a Net Income line in the equity section. On the first day of the next fiscal year that line starts again from the new year’s activity, and last year’s profit appears inside Retained Earnings instead. Nothing was posted. QuickBooks simply reports the earlier years’ income and expense as accumulated equity once they fall before the start of the current fiscal year.

Intuit adds a distinction that trips people up: "The retained earnings account isn’t the same as the retained earnings line item shown on the balance sheet." The account in your chart of accounts holds whatever has been posted to it directly. The Balance Sheet line combines that with the automatic rollover of prior-year profit. When the two disagree, the difference is usually the swap, not an error.

The practical upshot is that the Retained Earnings account register is a poor place to look for an explanation. If the Balance Sheet figure moved, the cause is almost always a transaction in an income or expense account dated in a prior year.

How to see what is in it

Intuit documents three ways to look behind the number.

The first starts from profit. Open the Profit and Loss report, set the Report period to All Dates, refresh, and select the Net Income amount to open the transactions behind it. That is the full history the rollover is built from.

The second compares years. On the same Profit and Loss report, select Customize, open Rows/Columns, and choose time periods from the dropdown to show each year side by side. Each prior year’s net income is one slice of Retained Earnings.

The third looks at the account itself. Go to the chart of accounts, find Retained Earnings, choose Run report from the Action dropdown, and set the period to All Dates. That shows only what was posted to the account directly, which on a clean file is little or nothing.

Why a direct entry to it is a warning sign

On a file that runs normally, nobody posts to Retained Earnings. The account fills itself from the rollover, and ordinary transactions have no reason to touch it.

Intuit’s own note on direct entries is short: "Manually adding Journal Entries to the Retained Earnings chart of account doesn’t include them in reports." Whatever the intent behind a journal entry to the account, it is an entry that behaves differently from everything else on the file.

There are legitimate reasons for one: an adjustment your accountant makes to a prior period, or clearing Opening Balance Equity once setup is finished. All of them are accountant decisions with a reason written in the memo. A direct entry with no memo, or one that forces the Balance Sheet to match a figure from somewhere else, is usually a sign that something upstream is wrong and has been papered over at the equity line.

What a Stripe business sees after a prior-year change

For a business whose QuickBooks file is fed from Stripe, Retained Earnings is where old corrections show up without explanation.

The usual pattern: last year is closed and the accountant has filed. In March someone deletes and re-enters a batch of prior-year sales receipts to fix a mapping, or books a refund, a returned dispute or a fee correction with the original transaction’s date. Every one of those changes last year’s net income. This year’s opening Retained Earnings no longer matches the figure on last year’s return, and there is no entry in the account to say why.

Two habits prevent it. First, date corrections in the open period unless your accountant has decided a prior-year adjustment is warranted. A refund issued in March belongs in March, and money from an old dispute that comes back belongs in the month it arrives. Second, keep a closing date on the finished year, so that anything dated into it has to get past a warning or a password and shows up on the Exceptions to Closing Date report.

When the figures already disagree, compare last year’s Profit and Loss as filed with the same report run today. The difference is the net income that moved. If a closing date was set, the Exceptions to Closing Date report lists the changes made to the closed period after it was closed.