How Retained Earnings Are Calculated
On the default Balance Sheet Report, the Retained Earnings amount is calculated as:
All income account balances
Minus all expense account balances
Plus the balance of an equity account named Retained Earnings (if present)
This means the net profit or loss shown on the default Income Statement report directly affects Retained Earnings on the Balance Sheet.
Impact of Year-End Closing Transactions
A year-end closing transaction resets all income and expense account balances up to the closing date.
These balances are then transferred into the equity account you select when creating the closing transaction.
After closing, the Balance Sheet begins accumulating new income and expenses for the next fiscal year.
Effect of Having a “Retained Earnings” Equity Account
If you have an equity account named Retained Earnings:
Its balance will be added to the calculated Retained Earnings on the Balance Sheet.
If you do not have an equity account named Retained Earnings:
The Balance Sheet will show only the net profit or loss from the Income Statement for the current period (since the last closing).
Tip: If you do not want the balance of your Retained Earnings equity account included, rename it to something other than Retained Earnings
Example
On 12/31/2023, you create a year-end closing transaction.
All income and expense balances are moved into an equity account named Equity (not Retained Earnings).
You run the Income Statement for 1/1/2024 – 4/30/2024.
The report shows a net profit of $5,000.
You then run the Balance Sheet with an end date of 4/30/2024:
Without a Retained Earnings account: Retained Earnings shows $5,000 (net profit for the current period).
With a Retained Earnings account (balance $20,000): Retained Earnings shows $25,000 ($20,000 existing balance + $5,000 profit).