Balance Sheet and Retained Earnings

[Buddha Buck]

On Sun, Dec 18, 2016 at 10:34 AM replicon <replicon at gmail.com> wrote:

> Hi all,
>
> I'm in the final stages of pulling the financial tracking for my side
> business (commercial property) into gnucash. Everything is basically done,
> but one final thing came up when working back and forth with my accountant
> on setting things up:
>
> I generated a Balance Sheet report for him, and he mentioned he's surprised
> to see Retained Earnings on there. His exact words:
>
> "the Balance sheet looks good save for “retained earnings.” This isn’t
> really a partnership equity account (it’s used in corporations), it’s
> actually just your p&l (or net income/(loss)) which is then closed out to
> the capital accounts at year end (we do this)."
>

The context here is that a balance sheet doesn't show income or expense
accounts, just assets, liabilities, and equity.

Traditionally, a balance sheet is generated only after the income and
expense accounts are closed out at the end of the accounting period -- at
which point, their balance is zero, so they don't affect the balance sheet
anyway.

When income and expense accounts are closed, their balances are transferred
to equity accounts (the capital accounts your accountant was talking
about).

Practically speaking, the income and expense accounts are a form of equity
accounts, just ones which are designed to hold temporary accumulated values
and periodically be transferred to other accounts.

If I'm reading that correctly, he wasn't expecting what appears to just be
> "income - expenses" to show up as an equity component on the balance sheet,
> because that gets tacked on through the profit/loss.
>

Something like that.

His comment about "retained earnings" being a corporate thing is correct,
in that corporations often have an explicit "retained earnings" equity
account which holds earnings (profits and losses) that have been retained
-- not distributed to shareholders/partners/etc. The "retained earnings"
line in the GnuCash balance sheet does the same thing. It reports profits
and losses that have not been distributed to equity accounts yet.

>
> I figured I just needed to go into the report settings and uncheck some
> checkbox, since these things are typically pretty configurable in GNUCash,
> but said checkbox doesn't seem to exist.
>

The balance sheet serves two purposes. The main purpose most people think
of is to show the state of the assets and liabilities of the business. But
the other main purpose is to show that all the money has been accounted
for. Not only does the balance sheet show all the account balances, but it,
itself, is supposed to be balanced. The total assets are supposed to equal
the total liabilities and equity.

If the "retained earnings" are missing, then the balance sheet won't be in
balance, and not all the moneys will be accounted for.

So my question to you is:

>
> Does GNUCash Balance Sheet just always include "Retained Earnings", or is
> it
> driven by either a setting I haven't found yet, or perhaps something based
> on the way I set up my CoA?
>

I do not believe that it will add a "Retained Earnings" line to the balance
sheet when the retained earnings is 0. But otherwise, it will.

When I asked if it'll be an issue, he did mention this was semantics and
> that I shouldn't worry too much about it, but... if there's a checkbox
> somewhere that will make my accounting more correct, then well, I want to
> find it hehe.
>

If you close your income/expense accounts before running the balance sheet,
then it shouldn't show up (or will be 0).

However, closing your income/expense accounts will typically make the
income statement (or profit and loss statement, or statement of revenues
and expenses, or whatever it's called in your jurisdiction) less useful, as
it reports the change in balances in the accounts between two points in
time. If you report from just after closing the books last period to just
after closing the books this period, the income statement will report 0
income and 0 expenses.

If you don't close your income/expense accounts (and GnuCash is happy to
work fine with that mode of operation), then you will get a "retained
earnings" line representing the accumulated profit/loss since the last time
the books were closed, and the income statements will work between any two
points in time.


>
> Thanks for all the help so far; this list has been really useful, and I
> want
> to say I appreciate the time people put in. :)
>
> cheers,
> Tamas
>
>
>
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