How to Zero Out Retained Earnings in QuickBooks?

When the fiscal year comes to an end, the remaining net income of the business after crediting the balance among the shareholders, partners, and owners is termed as Retained Earnings. 

QuickBooks Retained Earnings is like an equity account that lets you view the past year’s business expenses and profit and loss. Before the arrival of the new accounting period, QuickBooks automatically adds the previous year’s net income into the current year balance sheet as the Retained Earnings.

If the current year’s total assets are similar to the balance sheet liability, your retained earnings will be zero out for the ongoing year. To ensure the zero out Retained Earnings in QuickBooks account, read this blog till the end.

Essential Tips for Zero Out Retained Earnings in QuickBooks:

Retained Earnings are part of your profits reserved for the company reinvestment instead of distributed among shareholders, partners, and business owners.

Retained earnings are used mainly for re-investment in the business, supporting the working capital requirements, maintaining liquidity, paying off debts, etc.

Retained earnings act as a cushion against economic shocks whenever there is any liquidity shortage, unavailability of loans, or bank overdrafts.

If a capital investment is financed by debt, then you have to pay interest on the loan, while if retained earnings do it, then the business can enjoy profits without any interest payments.

Using retained earnings is more flexible and faster. Now, you can spend your money without waiting for a lender to process your request. You can put retained earnings into R&D, modernize your equipment, or hire an expanded staff.

Why is it Required to Zero out Retained Earnings in QuickBooks?

At the end of every fiscal year, the remaining net earnings of a business after dividing among the shareholders, partners, and owners is known as Retained Earnings. To start a new financial year with a net zero income, it becomes crucial to zero out your retained earnings in QuickBooks.

When you zero out your earnings, it provides easy access to all your previous accounting data for that accounting period, which holds your transaction details. Or else you have to create a comparative report.

Want to zero out Retained Earnings in QuickBooks to get access to your previous accounting data? Alright, just stay connected, and we will let you know why closing out your earnings at the end of every fiscal year is important.

What to do if the QuickBooks Retained Earnings are Wrong/Incorrect?

If you made any mistake while preparing your financial statements in the past, you can’t correct them as you have already generated/distributed such reports. However, you can make earlier period adjustments under the running period’s retained earnings account to fix the discrepancy.

For example, you unintentionally inflated/mis-entered your annual sales in the last fiscal year. To resolve this, you must debit the additional amount from the revenue account and credit it to the current period’s retained earnings account opening balance. This entry reduces revenue and retained earnings to reflect the exact financial status.

Also, you have to check your expense account to see if the retained earnings are wrong in the QuickBooks Account. For this, adhere to the instructions given-below:

1. Open the QuickBooks Desktop software.
2. Now, click the Gear icon available on the top left side of the screen and then select Charts of Accounts.
3. Look for the Income Summary.
4. If this option doesn’t pop up, then you need to Add an Expense account.
5. After this, you must add the owner’s equity account as a Retained Earning account.
6. Once done, locate the Profit and Loss account report or the Income Statement account.
7. You must apply the filter for your profit and loss account as a fiscal period.
8. Moving forward, review all revenue and expense accounts properly.
9. Select the New Journal Entry window to create a new journal entry to your account.
10. Furthermore, mention the closing date of the account and again navigate to the Profit and Loss account.
11. Choose All Revenues and All the Debit amounts.
12. From the last line of the entry, you have to opt for the Income Summary account you created recently and write the total revenue accounts.
13. At last, press the Save and Close button, and you are good to go.

Note: Be sure that all the calculations and numbers are filled accurately. After this, use this journal entry to troubleshoot How to easily zero out Retained Earnings in QuickBooks.

How to Enter, Adjust, and Zero out Retained Earnings in QuickBooks?

Below, we have explained how to enter, adjust, or zero out your retained earnings into the QuickBooks account. Let’s proceed ahead:

Enter the Retained Earnings in your QuickBooks Account

1. In QuickBooks, select the create + icon.
2. Now, choose the Journal Entry option to create a new one.
3. You need to adjust the refer date to match the opening balance date.
4. Search and locate the account column and navigate to the first line of the account.
5. Click on the Retained Earnings.
6. Under the credits column, fill in the amount of the balance.
7. Afterward, go to the second line and enter the amount you are accessing to create the balance.
8. Mention the amount under the debit column.
9. Finally, hit the Save and Close tab when you are done.

You may also read: How To Calculate Retained Earnings? (With Examples)

Adjust Retained Earnings in QuickBooks

When you find any irregularities between the retained earnings and the current fiscal year’s statement, in that case, you need to check out the transactions in the journal reports or the general ledger to clear them out. Also, some unstated numbers on your financial report may eventually lead you to inaccurate books of accounts. To edit and rectify this, adjusting the Transactions in the general ledger or journal reports is your only option.

Year-end Adjustments QuickBooks Performs Automatically

QuickBooks makes certain year-end adjustments according to your fiscal year start month.

1. QuickBooks adjusts your Income & Expense accounts at the end of the accounting period to zero them out so you can start your new fiscal year with zero net income.
2. QuickBooks attempts to make an adjusting entry to your net income. For instance, if your profit for the year was $12,000, the Balance Sheet’s equity section shows a line for a net income of $12,000 on the last day of your fiscal year.
3. On the first day of the new financial year, QuickBooks reclassifies your net income to retained earnings and decreases your net income by the same account so you can start each new fiscal year with zero net income.

Advantages of Closing Your Books:     

Restricted Access: You can create a closing date password to prevent unwanted access to your data from the prior accounting period, including every transaction detail. Make sure, being a user, you know the closing date password and have all the appropriate permissions to modify or delete transactions in a closed period.

Reporting: If there are any changes made after the closing date, they will be displayed in the Closing Date Exception Report.

• To run the report, navigate to the Reports menu and select Accountant & Taxes, then Closing Date Exception Report.
• The Closing Date History will display current and past closing dates and the user who set the closing date.

Advantages of not Closing Your Books:

Detail: You can easily access last year’s data, including transaction details.

Reporting: Create comparative reports between the current and the past year.

Zero out Retained Earnings in QuickBooks

Retained earnings help to review and analyze the profit & loss of the previous year. When the new financial year starts, the last year’s net income automatically enters into the current year’s balance sheet as the retained earnings. The retained earnings become zero when the total assets are equal to the total liability on the balance sheet.

There is no legal method to zero out your retained earnings in QuickBooks, but when a new closing date occurs, the retained earnings automatically get updated. Here are the steps to delete or zero out your retained earnings into your QuickBooks account. Let’s get started:

1. Firstly, open QuickBooks and then navigate to the Edit menu.
2. Now, select Preferences and click on the Accounting option.
3. Hit the Company Preferences tab and press the Set Date/Password button.
4. In the upcoming window, choose a Closing Date from the calendar.
5. Also, enter the Closing Date password and then confirm the changes you have made.
6. At last, press OK to close the window and then click Save & Close.

Steps to Close Out the Opening Balance Equity Account from Your QuickBooks Account!

To transfer the balance from the Income and Expense accounts to Retained Earnings, closing entries are made at the end of every fiscal year. The aim is to zero out your Income and Expense accounts and then transfer your fiscal year’s net income as Retained Earnings.

Closing entries are made once you record all adjusting entries. If the books are closed, you won’t be able to enter any entry for the past fiscal year. Some programs prevent you from making any entry, even if it corrects or makes your books more accurate. QuickBooks Desktop lets you enter the transactions that affect the closed fiscal year balance, but it warns you that it isn’t recommended or asks for the closing date password, which needs to be entered.

1. Firstly, navigate to the Profit and Loss Report or Income Statement in the QuickBooks Account.
2. Now, apply the filter to the income statement report to the fiscal period you are closing out.
3. After this, you have to note the Opening Balance Equity Account.
4. In the new browser tab, look for the New Journal Entry Window and provide the last day of the closing period date to create a new journal entry.
5. Navigate to the Income Statement and select the Opening Balance Equity Account.
6. Once done, create a debit account.
7. Continue with the last line of the entry and select the Income Summary account. Then, credit all the Opening Balance Equity accounts.
8. The final step is to click the Save and Close button.

Related Post: How to Link a Bank Account to QuickBooks?

Bottom-Line!

Thus, we can conclude that zeroing out retained earnings in QuickBooks is important and crucial for every smooth business functioning.

Hopefully, the above-given information is useful for you to get rid of this problem. But if you still facing any kind of issues with your software and need professional assistance, regarding accounting, bookkeeping & accounting software-related issues then feel free to get in touch with us at +1-802-778-9005, or you can mail to us at: [email protected]

FAQs

Which retained earnings calculation formula makes zeroing out Retained Earnings in QuickBooks easier?

Every organization calculates its retained earnings at the end of every fiscal year. It is usually based on monthly, quarterly, or annually. Here’s the formula for retained earnings.

Retained Earnings (RE) = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends.

Does Organized Closing Income Summary help zero out retained earnings in QuickBooks?

Yes, an arranged Closing Income Summary will be beneficial to zero out your retained earnings into the QuickBooks account. Here’s how:

1. Initially, create a new journal entry with the last closing period date.
2. Now, debit or credit the net income amount under the income summary account.

• If you have less revenue and more expenses, the amount must be debited.
• However, you will have to credit it if you have less profit than the expenses.

3. Hit the Retained Earning amount and match credit and debit to your income summary report.
4. Finally, select the Save and Close options.

Why is it needed to zero out Retained Earnings in QuickBooks?

Sometimes, the retained earnings can be negative, also known as retained deficit or accumulated deficit, when there’s a difference between total retained earnings and cumulative dividends. Paying more dividends from the total earned net profit may result in a deficit.

Negative retained earnings symbolize poor financial health, which means a company has experienced a big loss in the previous fiscal year, especially a net income loss. If retained earnings have consistently been negative, then a company won’t be able to gain profit for a long time.