Negative Retained Earnings

kjfycf · ‎January 24, 2025

Hi, I'm using QBO and getting negative retained earnings. Hoping someone can clue me in on what I am missing. Using simple numbers to show what is happening: first year we bought an office suite for $100K. At year end, gross income $50,000, expenses $40,000 (not including depreciation.) Had $10,000 in the bank, and took that as a distribution. Also at year end, included $2500 for depreciation on the office suite. QBO P&L shows net income $7500 (it includes the depreciation as an Other Expense.) Retained earnings seems to calculate as follows: previous end of year retained earnings ($0) plus current end of year net income ($7500) less current year distribution $10,000 equals negative $2500. If we do the same next year, the negative retained earnings would be larger by the depreciation amount (goes to negative 5,000.) Is there an accounting entry I am missing - or how would this be handled? Thanks in advance for any help.

Rainflurry · ‎January 26, 2025

@kjfycf

You're not missing any entries. When you depreciate property, that's a non-cash expense so it reduces your net and taxable income without reducing your cash balance. If your beginning RE is $0 and you distribute more than your current year net income, you have negative retained earnings ($7.500 - $10,000 = -$2,500) regardless of your bank account cash balance. In your example, imagine if your depreciation expense was $10,000 which reduced your net income to $0. The first dollar you distribute will drive RE negative.

To illustrate from a tax perspective: you received the benefit of the depreciation expense tax deduction so you're only paying income tax on the $7,500 net income. Therefore, you can't distribute $10,000 without it being subject to cap gains.

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FateCandylaneT · ‎January 24, 2025

Maintaining accurate accounting data ensures balanced financial records in your file, kjfycf. Let me guide you on how to correct your negative retained earnings.

In QuickBooks Online (QBO), retained earnings is an Equity account that represents the company's profits to be reinvested or used later. Thus, when retained earnings are negative, their balance shown under the stockholder's equity on the balance sheet is also negative.

Negative retained earnings happen when a company's losses exceed its starting retained earnings balance. On the Balance Sheet for the current year, you will see the Net Income. For prior fiscal years, you will see it as Retained Earnings.

With this, let's run the Retained Earnings account Quick Report to check transactions that affect the amount. Here's how:

In QBO, go to the Accounting menu on the left panel and choose Chart of Accounts.
From the list, look for your Retained Earnings account and click the Run report link under the Action column.
On the Account QuickReport page, head-tap the Report period drop-down and select All Dates.
Click the Run Report menu or Refresh report for the changes to take effect.

If there are amounts needed to correct or adjust, create a journal entry to fix the discrepancy. I also suggest reaching out to your accountant to check the categories used for the debit and credit. This is to ensure your books have the correct information.

To learn more about what makes up your Retained Earnings, you can browse this article: What makes up your Retained Earnings?.

Additionally, you'll want to seek additional guidance from our Live Expert Assisted team to help you keep track of your overall transactions.

Furthermore, this reference will guide you through the steps of viewing financial reports in QBO. From there, you’ll learn about exporting the statement, emailing your reports as well as printing one. Then, reconcile them.

This thread is always available for any additional queries you have when managing transactions in your account. Keep us posted, and we'll be around to help. Stay safe.

Briggs Bookkeeping 1 · ‎January 25, 2025

Hi,

Run your balance sheet for 3 years and change DISPLAY COLUMNS to Years. You can then see how retained earnings is changing each year. Run your Profit & Loss statement for same period and change DISPLAY COLUMNS to Years. You should see the Profit & Loss matching the retained earnings.

You can also see any entries made to Retained Earnings by running a General Ledger Report. Go to REPORTS and type in General Ledger Report in search box . Scroll down to Retained Earnings account and you will see any journal entries to Retained Earnings.

Did this help answer your question?

Rainflurry · ‎January 26, 2025

@kjfycf

If your net income is $7,500 and you make a $10,000 distribution, your retained earnings should be -$2,500. Are you expecting it to be something else?

kjfycf · ‎January 26, 2025

The business made $10K and had $10K in the bank. But including depreciation as an expense reduced net income to $7500, yet doesn't change the amount in the bank, and by taking all $10K from the bank as a distribution it would seem the retained earnings would have been $0.

So I was thinking there might be an accounting entry of some sort that I am missing that would result in the retained earnings reflecting $0.

Rainflurry · ‎January 26, 2025

@kjfycf

You're not missing any entries. When you depreciate property, that's a non-cash expense so it reduces your net and taxable income without reducing your cash balance. If your beginning RE is $0 and you distribute more than your current year net income, you have negative retained earnings ($7.500 - $10,000 = -$2,500) regardless of your bank account cash balance. In your example, imagine if your depreciation expense was $10,000 which reduced your net income to $0. The first dollar you distribute will drive RE negative.

To illustrate from a tax perspective: you received the benefit of the depreciation expense tax deduction so you're only paying income tax on the $7,500 net income. Therefore, you can't distribute $10,000 without it being subject to cap gains.

kjfycf · ‎January 27, 2025

Thank you to all who responded!

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