Each time a business closes its books for a fiscal year, QuickBooks will update the retained earnings account with the net income (or loss) from that period. The retained earnings account is important because it allows business owners to keep track of how much profit has been retained in the company over time. This is a vital indicator of financial health, as it shows whether the business is growing its equity or whether it’s relying on external financing to fund operations.
To understand how retained earnings are calculated in QuickBooks, it’s essential to look at the flow of financial data in the accounting system. QuickBooks takes the net income or loss from the Profit and how to produce an income statement in QuickBooks Loss statement and transfers it to the retained earnings account at the end of each fiscal period. This transfer happens automatically when you close your books for the year. QuickBooks uses the amount of net income earned during the period and adjusts the retained earnings accordingly. If the company has a net profit, the retained earnings balance increases. Conversely, if the company experiences a net loss, the retained earnings balance will decrease.
One of the key functions of retained earnings in QuickBooks is to keep track of the company’s accumulated profits. This information is critical for business decision-making and financial planning. Retained earnings can be used as a source of internal funding for future investments or as a cushion for lean periods when revenue might not be as strong. It’s also important for businesses to monitor their retained earnings because large negative retained earnings can indicate financial difficulties or consistent losses, which may raise concerns for investors or lenders.
Retained earnings are not just about tracking profits—they are also a component of overall equity. Equity represents the ownership interest in a company, and retained earnings contribute to that interest. The more retained earnings a business has, the higher its equity, which in turn makes the company more attractive to investors and creditors. A positive retained earnings balance signifies that the company has accumulated profits over time and has built a solid financial foundation. This can help secure financing, negotiate better terms with suppliers, and even attract potential buyers if the business decides to sell.
Another important aspect of retained earnings in QuickBooks is the treatment of dividends or distributions. When a company distributes profits to shareholders or owners, the retained earnings account is reduced by the amount of the dividend or distribution. QuickBooks makes it easy to track these transactions by recording them as journal entries or through the use of specific dividend accounts. This ensures that the retained earnings account accurately reflects the amount of earnings that have been paid out, rather than retained in the business.
