[GNC] When closing books, equity statement report is incorrect

[Quinn Wood]

On Sun, Oct 22, 2023 at 3:56 PM Stan Brown (using GC 4.14) <
stan+gc at fastmail.fm> wrote:

> On 2023-10-22 12:55, Quinn Wood wrote:
> > The only use case where retained earnings comes into play is when
> > performing bookkeeping for a business that is taxed separately from its
> > owners.
>
> I don't think that's right.
>
> (1) I was on the Board of a 501(c)(3) tax-exempt charity, and we had
> retained earnings. They were the excess of income over expenses for the
> year to date.
>
> (2) I have retained earnings -- again, the excess of income over
> expenses for year to date. Part of that is gains and losses on
> investments, both realized and unrealized. It would never occur to me to
> call that "discretionary spending money", _especially_ the unrealized
> gains.
>

501(c)(3) organizations are still [non-profit] corporations, and non-profit
corporations that have taxable income (maybe they don't have tax-exempt
status, maybe they've generated some income from activity that doesn't fall
under a tax-exempt umbrella) are taxed independently of anyone else. The
terminology is a bit different in a number of places on a non-profit's
documents, for example the non-profit doesn't have owners so there's no
such thing as "owner's equity," but the core principle here is the same. If
I were a lender, I would expect to see the term "net assets" instead of
"retained earnings" on a balance sheet for a non-profit whether it's
tax-exempt or not, I would expect to see the term "net worth" rather than
"retained earnings" in the case of a natural person.

My objective isn't to be pedantic for no reason, but to illustrate the
distinctions when communicating financial state, which is what financial
accounting is all about. To summarize, "retained earnings" in the strictest
sense is income after expenses that has been OPTIONALLY kept by the
business instead of passed to the business' owners. In the case of a
non-profit or a natural person, it wouldn't really be classified as
retained earnings, because there's no option not to retain it. Sole
proprietorships, partnerships, and disregarded entities are in the opposite
situation — there's no option not to pass it on to business owners.