Kendor
01-06-2007, 02:09 PM
(Conitinued from Part 1)
DAY ON WHICH TRANSFERS SHOULD BE DONE
The transfers out of the RE Account should, according to QB, be done on the last day of the financial year and at first sight this might seem correct, but the late Joey recommended that they be done on the first day of the next year “so that one can still go back and print a balance sheet dated the last day of the last financial year with all the information on it”.
I’m not convinced that it makes much difference which date one uses to make the journal entries: it seems to me that the QB balance sheet is irredeemably confusing whatever date one uses.
For example, I am a sole proprietor and my auditors, wisely in my view, ignore the QB format of my balance sheet, and in the balance sheet they prepare they have a nice, straightforward statement:
1,000.00 - Owner’s Equity at beginning of year
2,000.00 - Add Net Profit for the year
3,000.00
1,700.00 - Less Owner’s Draws during year
1,300.00 - Owner’s Equity at year-end
(with subtotal and total lines after the 2000 and 1,700 respectively).
The corresponding lines on the QB balance sheet if one enters the journal entries on the last day of the year are:
Equity
1,300.00 Owner’s Equity
1,700.00 Retained Earnings
2,000.00 Net Income
1,300.00 Total Equity
The corresponding lines if the journal entries are made on the first day of the next year are:
Equity
700.00 Owner’s Equity
2,000.00 Net Income
1,300.00 Total Equity
One doesn’t need to be a rocket scientist to see that either QB balance sheet is a miserable reflection of a simple concept.
MISCELLANEOUS
Some miscellaneous additional points that I may mention are:
• At the end of each financial year the balances in all Income and Expenses Accounts are transferred automatically to an invisible Profit and Loss Account, leaving the Income and Expense Accounts with nil balances for the start of the new year. The balance in the invisible Profit and Loss Account is the net profit (or loss) for the year just ended and this balance is what is automatically but invisibly transferred into the RE Account;
• The RE Account is an Equity account but the number automatically assigned by QB to the account is 1110 which is in the 1xxx series normally reserved for Asset Accounts instead of being in the 3xxx series for Equity Accounts; however, one can change the number – with acknowledgement to various participants;
• If you take out a QuickReport on an Income or Expense Account, it will show all credits and debits if you select All under Dates. But if you select a specific period spanning more than one financial year it will only show all the credits and debits since the last financial year-end together with the net total of the debits and credits for the period prior to that, with the description “Total Retained Earnings” – per Suzanne. (“Transferred to P & L Account” might have been a happier description);
• Corrections are sometimes best posted to the RE (#2) Account, notably where the entry to be corrected occurred in a previous financial year. This needs fuller explanation but it is too large a topic to cover in detail in this note and will have to await another note;
• The RE (#2) Account name can be changed to Accumulated Adjustments Account if an S Corp has always been an S Corp and there were never any C Corp earnings amounts - per Joey;
• Retained Earnings is "closed" at financial year-end. To close on a monthly basis, you would have to manually make the necessary journal entries and that is not normal accounting practice. You can get the monthly net profit from the Profit & Loss Report – per Joe;
• When you enter a new Customer with an Opening Balance, the income account that QuickBooks uses to offset the Accounts Receivable Account is Uncategorized Income. That account can be "cleared" with journal entries to the correct income accounts if the opening balance date was this year. They will automatically report in Retained Earnings if the date was last year – per Joe.
FINAL CONCLUSION
It would be nice if QB dealt with Retained Earnings transparently, directly, in full detail and with correct descriptions and if its balance sheets were simple and easy to read and understand. Much confusion – including on QB’s own part - would thereby be avoided. It is to be hoped that the steps already initiated to put matters right in the higher versions of QB will be speeded up and extended to other versions.
Ken
DAY ON WHICH TRANSFERS SHOULD BE DONE
The transfers out of the RE Account should, according to QB, be done on the last day of the financial year and at first sight this might seem correct, but the late Joey recommended that they be done on the first day of the next year “so that one can still go back and print a balance sheet dated the last day of the last financial year with all the information on it”.
I’m not convinced that it makes much difference which date one uses to make the journal entries: it seems to me that the QB balance sheet is irredeemably confusing whatever date one uses.
For example, I am a sole proprietor and my auditors, wisely in my view, ignore the QB format of my balance sheet, and in the balance sheet they prepare they have a nice, straightforward statement:
1,000.00 - Owner’s Equity at beginning of year
2,000.00 - Add Net Profit for the year
3,000.00
1,700.00 - Less Owner’s Draws during year
1,300.00 - Owner’s Equity at year-end
(with subtotal and total lines after the 2000 and 1,700 respectively).
The corresponding lines on the QB balance sheet if one enters the journal entries on the last day of the year are:
Equity
1,300.00 Owner’s Equity
1,700.00 Retained Earnings
2,000.00 Net Income
1,300.00 Total Equity
The corresponding lines if the journal entries are made on the first day of the next year are:
Equity
700.00 Owner’s Equity
2,000.00 Net Income
1,300.00 Total Equity
One doesn’t need to be a rocket scientist to see that either QB balance sheet is a miserable reflection of a simple concept.
MISCELLANEOUS
Some miscellaneous additional points that I may mention are:
• At the end of each financial year the balances in all Income and Expenses Accounts are transferred automatically to an invisible Profit and Loss Account, leaving the Income and Expense Accounts with nil balances for the start of the new year. The balance in the invisible Profit and Loss Account is the net profit (or loss) for the year just ended and this balance is what is automatically but invisibly transferred into the RE Account;
• The RE Account is an Equity account but the number automatically assigned by QB to the account is 1110 which is in the 1xxx series normally reserved for Asset Accounts instead of being in the 3xxx series for Equity Accounts; however, one can change the number – with acknowledgement to various participants;
• If you take out a QuickReport on an Income or Expense Account, it will show all credits and debits if you select All under Dates. But if you select a specific period spanning more than one financial year it will only show all the credits and debits since the last financial year-end together with the net total of the debits and credits for the period prior to that, with the description “Total Retained Earnings” – per Suzanne. (“Transferred to P & L Account” might have been a happier description);
• Corrections are sometimes best posted to the RE (#2) Account, notably where the entry to be corrected occurred in a previous financial year. This needs fuller explanation but it is too large a topic to cover in detail in this note and will have to await another note;
• The RE (#2) Account name can be changed to Accumulated Adjustments Account if an S Corp has always been an S Corp and there were never any C Corp earnings amounts - per Joey;
• Retained Earnings is "closed" at financial year-end. To close on a monthly basis, you would have to manually make the necessary journal entries and that is not normal accounting practice. You can get the monthly net profit from the Profit & Loss Report – per Joe;
• When you enter a new Customer with an Opening Balance, the income account that QuickBooks uses to offset the Accounts Receivable Account is Uncategorized Income. That account can be "cleared" with journal entries to the correct income accounts if the opening balance date was this year. They will automatically report in Retained Earnings if the date was last year – per Joe.
FINAL CONCLUSION
It would be nice if QB dealt with Retained Earnings transparently, directly, in full detail and with correct descriptions and if its balance sheets were simple and easy to read and understand. Much confusion – including on QB’s own part - would thereby be avoided. It is to be hoped that the steps already initiated to put matters right in the higher versions of QB will be speeded up and extended to other versions.
Ken