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Retained Earnings isn't transferring to equity at the end of the accounting cycle. How do I fix this?

So I've recently started handling bookkeeping for a small business owner, and the owner complained that he was having problems with a negative Owner's Equity even though he was sure he was making a profit. 

 

So I spent a while going through several years of records, making sure that everything was properly recorded since his Quickbooks had a habit of matching customer payments to invoices randomly and recording duplicates of certain expenses, and yes, he had a positive net income. He had been paying himself with regular bank transfers, under an Owner's Draw account that was a sub-account of Owner's Equity, but the payments were less than the income from operations, so it didn't seem right that Owner's Equity was negative - I know that at the end of the accounting cycle (which he has set to a year) the revenue and expense accounts and everything should be closed out to net income, and net income to retained earnings, and retained earnings into Owner's Equity. It appeared that nobody had ever done this before, so I looked online to figure out how to set up a net income account (since QB makes you choose whether it's an income or equity account)  and found that supposedly, Quickbooks automatically does all of this and transfers it into Owner's Equity at the end of the year.

 

But the more I looked, the more clear it is that it hasn't been happening. I looked at the Owner's Equity account and there are no transfers into it or any of the sub-accounts other than the opening balance a few years ago. I went back and found Retained Earnings on the balance sheet, and sure enough, it was the right amount for the net income for literally the entire time he'd been in business - shouldn't it only be the net income for year to date? And then it got even weirder: I tried to run a report for Retained Earnings for all dates, but no transactions at all showed up - nothing in, nothing out, even though I expect that there should be regular entries to record the net income that's going into the account, and also an entry on December 31st of every year to record that it's closed out to Owner's Equity. 

 

I thought of doing it all manually with journal entries in and out of the retained earnings account, but the problem with that is that since, somehow, the  net income is being credited to retained earnings, doing that would be duplicating everything. I suppose it's technically possible to only journalize the transactions from retained earnings to equity, but I really, REALLY don't like the idea of trying to journalize transactions involving an account that I can't even see! 

 

So how in the world can I fix this? I'm looking through all the help topics I can find, but since all of the answers are "Quickbooks does it automatically" I've found absolutely nothing that explains how to fix it when Quickbooks DOESN'T do it automatically.

 

 

Solved
Best answer 09-27-2019

Accepted Solutions
QuickBooks Team

Re: Retained Earnings isn't transferring to equity at the end of the accounting cycle. How do I f...

Welcome to the Community, @rnoble0422.

 

I appreciate you sharing in-depth information about the Retained Earnings isn't transferring to Equity account. Let me provide some insights about the Retained Earnings and help you fix it.

 

That's correct. QuickBooks will automatically accumulate year-end balances of your business to the Retained Earnings. Thus, it gathers all the net income and will be inline with the Equity account which is included in the total Equity. However, QuickBooks will not automatically transfer the net income to Owner's Equity.

 

To fix it, you would like to consider creating a journal entry to transfer the Retained Earning to Owner's Equity. This way, your Owner's Equity will not be on a negative amount. You can use the Retained Earnings and Owner's Equity accounts upon creating a journal entry.

 

But I still encourage you seeking help from your accountant. This way, they can offer you some advice on how to properly record it that suits your business and to your books.

 

In case you want to view Retained Earnings account details, you can read this article for your reference: How to View Retained Earnings Account Details.

 

Please know that you can always get back to this post if you have any other questions. The Community team and I are always here to help.

View solution in original post

2 Comments
QuickBooks Team

Re: Retained Earnings isn't transferring to equity at the end of the accounting cycle. How do I f...

Welcome to the Community, @rnoble0422.

 

I appreciate you sharing in-depth information about the Retained Earnings isn't transferring to Equity account. Let me provide some insights about the Retained Earnings and help you fix it.

 

That's correct. QuickBooks will automatically accumulate year-end balances of your business to the Retained Earnings. Thus, it gathers all the net income and will be inline with the Equity account which is included in the total Equity. However, QuickBooks will not automatically transfer the net income to Owner's Equity.

 

To fix it, you would like to consider creating a journal entry to transfer the Retained Earning to Owner's Equity. This way, your Owner's Equity will not be on a negative amount. You can use the Retained Earnings and Owner's Equity accounts upon creating a journal entry.

 

But I still encourage you seeking help from your accountant. This way, they can offer you some advice on how to properly record it that suits your business and to your books.

 

In case you want to view Retained Earnings account details, you can read this article for your reference: How to View Retained Earnings Account Details.

 

Please know that you can always get back to this post if you have any other questions. The Community team and I are always here to help.

View solution in original post

Frequent Explorer **

Re: Retained Earnings isn't transferring to equity at the end of the accounting cycle. How do I f...

Thanks, that solution worked for the net income by year. I'm still super uncomfortable with the fact that there's an account that I can't actually see, but I guess that's just unavoidable with Quickbooks.

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