@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.