Retained earnings are a crucial part of a company’s financial statement. They represent the accumulated profits or losses of a company that have not been distributed to shareholders as dividends. When a company wants to reset its retained earnings balance to zero, it is referred to as “zeroing out retained earnings.” In QuickBooks, this process involves a few steps that business owners need to understand.
What are retained earnings?
Retained earnings are a company’s cumulative profits or losses that have not been distributed as dividends to shareholders. They are a crucial component of a company’s financial statement because they represent the amount of money that a company can reinvest in its business. Retained earnings are calculated by subtracting the total dividends paid to shareholders from the company’s net income. If a company has a negative retained earnings balance, it means that it has accumulated losses that have not been recovered.
Why would a company want to zero out retained earnings?
There are several reasons why a company may want to zero out its retained earnings balance. For example:
- A company may want to start a new fiscal year with a clean slate.
- A company may want to change its dividend policy or payout ratio.
- A company may be preparing to sell or merge with another company and wants to show a zero balance to potential buyers.
Regardless of the reason, it is important to understand that zeroing out retained earnings does not erase the company’s financial history or affect its tax liabilities.
What are the steps to zero out retained earnings in QuickBooks?
Here are the steps to zero out retained earnings in QuickBooks:
Step 1: Create a backup of your QuickBooks file
Before making any changes to your QuickBooks file, it is essential to create a backup. This will ensure that you have a copy of your data in case something goes wrong.
Step 2: Create a journal entry to zero out retained earnings
To zero out retained earnings in QuickBooks, you need to create a journal entry. Here’s how to do it:
- Go to the Company menu and select Make General Journal Entries.
- In the Make General Journal Entries window, enter the date of the journal entry.
- In the Account column, select the Retained Earnings account.
- In the Debit column, enter the balance of the Retained Earnings account.
- In the Name column, select the equity account that you want to transfer the balance to.
- In the Credit column, enter the same amount as the Debit column.
Step 3: Review the balance sheet and profit and loss reports
After creating the journal entry, you should review the balance sheet and profit and loss reports to ensure that the retained earnings balance has been zeroed out.
Step 4: Close the books for the year
Closing the books for the year involves making sure that all transactions are recorded and that the accounts are reconciled. This ensures that the financial statements are accurate and that the retained earnings balance has been correctly reset to zero.
Step 5: Start the new fiscal year with zero retained earnings
Once you have zeroed out your retained earnings balance, you can start the new fiscal year with a clean slate. This means that you will not have any retained earnings from the previous year, and all profits and losses will be recorded in the current year’s financial statements.
Conclusion
Zeroing out retained earnings in QuickBooks can be a useful tool for companies that want to start a new fiscal year with a clean slate, change their dividend policy, or prepare for a merger or acquisition. It involves creating a journal entry to transfer the balance of the Retained Earnings account to another equity account, reviewing the balance sheet and profit and loss reports, and closing the books for the year. Learn More
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