Understanding Retained Earnings

Retained Earnings are the company's accumulated net income or loss, less cash dividends paid, plus or minus prior period adjustments from the date that the corporation began to the present.

Clear and Close:

The year-end Clear and Close Accounts process uses the Retained Earnings account when clearing the income and expense account balances.

For each income and expense account, the routine zeros out the account by crediting or debiting the account for the amount of the account ending balance.  It offsets the credit or debit with a balancing transaction to the Clear To Account Number, which is the number of the Retained Earnings Account.  The transactions usually are posted to Period 14, the closing Period, although you can specify any period you want.

Year-End Adjusting Entries:

Following the close of the year, you can make adjusting entries using Year-End Adjusting Entries Maintenance.  If the adjusted account is an Income or Expense Account Type, the Post Adjusting Entries routine posts the transactions for the account to the history Ending Balance.  However, the posting to the Clear To Account  is made to the Beginning Balance of the current year.

Tip:  For more information about the Clear To Account, see Understanding Retained Earnings.

Notes:

• In Account Master Maintenance, set up a single Retained Earnings account and specify Net Worth as the Account Type.  Set the Control Account option to No.
  Note:  There usually is only one Retained Earnings account.  An exception might be a municipality that maintains a separate Retained Earnings account for each fund.

• For every expense account and every income account, specify the Account Number for the Retained Earnings account in the Clear To Account Number field.
  Tip:  Every income and expense account usually specifies the same Clear To Account Number.