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  #1  
Old 11-02-2004, 05:27 AM
Kendor Kendor is offline
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Retained earnings

I have QB 2003 Pro UK version.

The Online Manual states:

"QuickBooks performs certain year-end adjustments ... . QuickBooks ... automatically adjusts your income and expense accounts at Year-End to zero them out. Therefore, you start your new fiscal year with a zero net income. QuickBooks ... makes an adjusting entry with your net income. It posts it to the Retained Earnings account ...".

I have taken out a Custom Transaction Detail Report for Retained Earnings set to show debits and the only entries apart from an opening credit are debits for the net profit each year journalised by me to my drawings account. There are no corresponding credits for the posting of the net income to Retained Earnings and the there is accordingly a large debit balance in Retained Earnings.

I could find nothing helpful in the Online Manual, the QB Manual and Kathy Ivens "QuickBooks 2003". Sleeter's QB 2003 "Consultant's Reference Guide" contains the following statement (at page 663) which I find somewhat opaque:

"In fact, QuickBooks never really creates a transaction for the closing entry, but when you create a Balance Sheet, QuickBooks calculates the balance in Retained Earnings by adding together the total net income for all prior years. At the end of your company's fiscal year, QuickBooks automatically transfers the net income into Retained Earnings."

QuickBooks closes my accounts correctly at the end of each fiscal year and prepares a correct Balance Sheet and Profit and Loss Account but I am curious as to whether it is failing to post the net income each year to Retained Earnings when it should be doing so.

Incidentally, Sleeter also recommends that in the case of a sole proprietorship one should rename Retained Earnings to Owner's Equity. I wonder, however, how wise this is seeing that Retained Earnings does not have a register with the result that the detail of the entries to the account can only be accessed via a Custom Detail Transaction Report.

Ken
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  #2  
Old 11-02-2004, 12:28 PM
Joey Joey is offline
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No, it really DOES show the difference between the income and expense at year end in the Retained Earnings equity account for the next year. The Dividend Draws equity account must be manually closed into the Retained Earnings via journal entry.
You should be able to check the number manually yourself by comparing it to your tax return or just taking the difference by hand for each year and adding them up. If you look at your income or expense accounts for any given year, they always begin at zero. They wouldn't do that if the program hadn't zeroed them out for the prior period.
As for the sole proprietorship, the amount that is in the account is the net income amount from all the prior Profit & Loss reports so why does it need a register?
Anyway, I have heard that the Premier Accountant's Version of the program is supposed to contain a register for the Retained Earnings account in the new version. I guess enough people wanted that ability.
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Old 11-02-2004, 07:08 PM
Kendor Kendor is offline
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Joey

Many thanks. Where does Retained Earnings show the automatic credit of net profit at year end? No amount is shown for Retained Earnings in the Chart of Accounts, there is no registry for retained Earnings and the Retained Earnings Report I generated seems to show only the journalised transfers, if any, out of Retained Earnings, eg to Drawings. The total on the Retained Earnings Report therefore seems to be the total not of accumulated net profit over the years but the accumulated transfers out of Retained Earnings. These transfers may or may not equal net profit. In fact, I wonder how many users are even aware of the desirability of doing these journal entries. I don't recall any reference to them in the manual or online help.

I mistakenly assumed that "retained" earnings referred to earnings retained in the business, ie not drawn/distributed. I was also confused by the fact that despite having selected both debits and credits in the filters for the Report it only reflects the debits for transfers out of Retained Earnings and not the automatic credits of net profit. Am I missing something?

The absence of a registry for what we used to call the Profit and Loss Account, especialy when it is so fraught with complexities, seems to me to be a shortcoming in QB, and I welcome the new direction you mention of incorporating such a registry in the Premier Accountant's version. I hope that this will be extended to other versions too.

I'm not sure how an account without a registry, such as Retained Earnings, can be a suitable vehicle for Owner's Equity, as suggested by Sleeter. The addition of a registry will overcome the problem.

Ken
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Old 11-03-2004, 09:42 AM
Joey Joey is offline
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" The total on the Retained Earnings Report therefore seems to be the total not of accumulated net profit over the years but the accumulated transfers out of Retained Earnings. These transfers may or may not equal net profit. In fact, I wonder how many users are even aware of the desirability of doing these journal entries. I don't recall any reference to them in the manual or online help.

I mistakenly assumed that "retained" earnings referred to earnings retained in the business, ie not drawn/distributed. I was also confused by the fact that despite having selected both debits and credits in the filters for the Report it only reflects the debits for transfers out of Retained Earnings and not the automatic credits of net profit. Am I missing something?"

Ken, your error here is in looking at the Retained Earnings balance as the amount transferred OUT of the account. I'm not sure about your report, but the real balance in Retained Earnings on the Balance Sheet (the report I use) is the amount that is "retained", as you said, in the company after the draws have been taken out. It is the "difference" between the closed net income and the draws amounts for each year which is RETAINED. This may be something to do with the way your custom report is displaying the amounts or you're just reading it incorrectly.
The journal entries to close Draws MUST be done at year end regardless of what the manual says. Most people, who post their accountant's year end entries, will find that this is one of them. Those who do not make the entry and choose to do their own returns are part of that group that has no idea that their Balance Sheet is incorrect and many times have never even looked at that report. These folks usually only look at their Profit & Loss and don't even know or care about the companies assets and liabilities either. They also usually have a large balance in the Opening Balance Equity account, which should always be zero.
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  #5  
Old 11-05-2004, 02:20 PM
Kendor Kendor is offline
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Joey

Many thanks. As always, I value your insights highly. Although you will see that I take issue with you on one or two minor issues essentially of terminology, you pointed me in the right direction at a time when I was struggling to make head or tail of how QB deals with Retained Earnings.

My sympathy goes out to users who need to make journal entries not mentioned in the manual and online help; in fact, all one finds is the claim that QB closes out the year end automatically. I wonder why it hasn't been programmed to in fact do the necessary journal entry automatically. It could easily do so.

I don't know that I would describe the balance sheet figure for Retained Earnings as net profit less draws (which is of course the classic definition of retained earnings). Before doing the journal entry transferring the net profit out to, say, Drawings, the figure is pure net profit without any deduction for draws, and after doing the journal entry it is net profit less the amount transferred out of Retained Earnings by the journal entry whether or not the transferred amount has been drawn out of the business. It therefore seems to me that "Retained Earnings" is a rather inapt and misleading expression. In fact, after the appropriate journal entry has been passed the balance in Drawings is the true retained earnings. This inapt terminology is not without repercussions. I will return to this below.

The balance sheet figure for Retained Earnings does not of course give any breakdown, and it was for this reason I tried to extract a report showing the breakdown in the absence of a register for Retained Earnings. The report however then failed to reflect the credits for net income, misleadingly showing only the debits for amounts transferred out of Retained Earnings.

The problem with not having a register or proper report for Retained Earnings arises when one wants to find out what has taken place in Retained Earnings, eg if one has made an error which one wants to identify and put right. Without either a register or report showing all the entries one has a real problem, especially if one is trying to understand how QB deals with Retained Earnings. The misleading terminology and omissions from the manual and online help muddy the water further.

I guessed that I could simply pass a journal entry for the Retained Earnings figure even though it differed from net profit but I was reluctant to do so without understanding what was going on in the background. Passing entries that I don't understand and are not referred to in the manual or online help is something I try to avoid because it can be a recipe for disaster.

I therefore understand why QB has now decided to introduce a register for Retained Earings. Retained Earnings is after all essentially what we used to call the Profit and Loss Account, which no-one would have thought of doing away with. The adding of a register is a wecome development and I hope that it will soon be extended to other versions of QB too.

QB also needs to elaborate the manual and online help to deal more fully with Retained Earnings, especially the need for a journal entry transferring the net profit out of Retained Earnings to Drawings or whatever. (Incidentally, Kathy Ivens' book doesn't even have an index entry for Retained Earnings.) Until then I suspect that it is only rather accounting-savvy users who are going to realise that such a journal entry is needed. This runs counter to QB's oft repeated claim that no prior knowledge of accounting is needed to use QB.

Thank you once again.

Ken
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