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Retained earnings

Retained earnings is the profit a business has kept: every prior year's net income, less losses and less the dividends or distributions paid out of it. It sits in the equity section of the balance sheet with a normal credit balance, and QuickBooks adds the prior year's net income to it automatically when a new fiscal year starts.

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Last reviewed October 2026

Why retained earnings matters

Retained earnings

The year-end roll-up, worked $18,300 Prior balance PLUS $52,140 Net income = $70,440 New balance P&L CLOSES TO EQUITY AUTOMATIC AT YEAR-END
Read this as text

A prior retained earnings balance of $18,300 plus this year's net income of $52,140 equals a new retained earnings balance of $70,440. At year-end the profit and loss closes into equity automatically. A worked example with illustrative figures.

The year-end roll-up: last year's ending retained earnings, plus this year's net income, becomes the new retained earnings balance — QuickBooks moves it in automatically on the first day of the new fiscal year, without a visible transaction. Figures are illustrative.

Retained earnings ties the profit and loss statement to the balance sheet: it is the running record of every dollar the business earned and chose to keep.

Read together, net income tells you how a single year went and retained earnings tells you how every year before it added up. When the number is right, the balance sheet balances and the equity section tells an honest story about how the business was funded. When it is wrong, it is usually a symptom — a prior period was disturbed, an opening balance was mis-entered, or someone posted where they should not have. That makes it one of the most useful accounts to read during a review, because it quietly records the health of every close that came before it.

It is also the account that most often surprises owners, precisely because nobody enters it by hand. A business can run for years without anyone looking at the account, then open the balance sheet before a loan application or a sale and find a number that does not match any story they can tell about the company. That gap is worth closing before it matters: retained earnings is what a lender, a buyer, or a new accountant reads first to judge whether the books have been kept honestly over time, so a figure you can explain line by line is worth more than a bigger figure you cannot.

The retained earnings formula, worked through

Retained earnings at the end of a year is the balance at the start, plus that year's net income — or minus its net loss — minus the dividends or distributions paid out of earnings. Intuit's equity guide describes the account the same way: accumulated profits “increased by net income and decreased by dividends declared” (Intuit: what is equity?, checked October 2026).

Using the illustrative figures in the diagram above: a business starts the year with $18,300 of retained earnings and earns $52,140 of net income, so before any payout it carries $70,440. If it is a corporation that pays $20,000 of dividends out of those earnings, the ending balance is $50,440. Had the year produced a $25,000 loss instead, the balance would have fallen to a $6,700 deficit — a negative retained earnings balance, called an accumulated deficit, which simply means the business has lost more over its life than it has kept.

Two things the formula is not. It is not cash: retained earnings records profit kept in the business, and that profit may already be sitting in equipment, inventory, unpaid customer invoices or a paid-down loan, so a large balance can sit next to a small bank account. And it is not every kind of equity: money owners put in, and money they take out, have accounts of their own.

Normal balance and how it reads on a trial balance

Retained earnings is an equity account, and equity accounts carry a credit balance: credits increase them and debits reduce them. Intuit's own opening-balance instructions enter equity balances in the credit column for exactly that reason (Intuit: what to do if you didn't enter an opening balance, checked October 2026).

On a trial balance, a healthy retained earnings line sits in the credit column. A year's net income closes into it as a credit; a net loss closes in as a debit; and dividends declared by a corporation reduce it with a debit. A debit balance on the line is the accumulated deficit described above — worth understanding before anyone reads it as a mistake, because in a business that has had loss years it is simply true.

How QuickBooks rolls net income into retained earnings

QuickBooks does the roll-up for you: on the first day of a new fiscal year it moves the prior year's net income out of the profit and loss and into the retained earnings account, with no journal entry for you to make.

The account is created automatically in every company file, and the software treats it as special — it is the destination the whole profit and loss statement empties into when the year turns. Because the movement is automatic, there is no dated transaction you can open to see it; QuickBooks calculates it on the fly. That is why the account's register looks empty even though the balance is large, and why the figure can shift the moment you change your fiscal-year-start setting or edit a transaction in a prior period. Intuit describes the year-end move as a transfer “called an electronic swap” that “doesn't record any visible transactions,” so the only entries a report of the account will ever show are ones someone made by hand (Intuit: view retained earnings account details, checked October 2026). It also means the account should stay hands-off: the software maintains it, and manual entries fight the automation rather than helping it. If you want to confirm the mechanics for your version, the QuickBooks Learn & Support library documents the account and the year-end behavior for both Online and Desktop.

Where the figure shows, and the settings behind it

You will find retained earnings under the equity section of the balance sheet, not on the profit and loss. In QuickBooks Online, though, Intuit is explicit that “you can't simply select Retained Earnings from the Balance Sheet to view details.” The figure is rebuilt from the profit and loss instead: run the Profit and Loss report from Reports → Standard reports for All Dates and select the Net Income amount to see every transaction behind it, or customize the report's columns to show each year, which shows how much each year added. For entries someone made by hand, go to All apps → Accounting → Chart of accounts, find Retained Earnings and run its report for All Dates — Intuit's Account QuickReport, which lists user-created transactions affecting the account. Those reports are the closest thing to an audit trail the account has, since the roll-up itself is computed rather than posted. Intuit also notes that the retained earnings account “isn't the same as the retained earnings line item shown on the balance sheet,” so when you check the number, compare those reports with the balance sheet line rather than with the account's nearly empty register.

Two settings shape how the account behaves and are worth checking before you trust the number: the fiscal-year-start month, which tells QuickBooks when to perform the roll-up (Settings → Account and settings → Advanced → Accounting, First month of fiscal year), and the closing date with its optional password, which locks prior periods so a stray edit cannot silently rewrite the balance after a year is done. In QuickBooks Online the closing date is Close the books in that same Accounting section, where you can require a warning, or a warning and a password, before anyone changes a transaction dated on or before it; in Desktop it is Company → Set Closing Date (Intuit: close the books in QuickBooks Online, checked October 2026). Retained earnings is also a genuinely different figure across entity types — for a C corporation it accumulates and is distributed through dividends, while pass-through entities move much of their equity through owner accounts — but the QuickBooks account exists and rolls the same way regardless.

Retained earnings versus owner's draws and distributions

Retained earnings records profit the business kept; owner's draws and distributions record money the owners took out. They are different equity accounts serving opposite purposes, and QuickBooks does not net one against the other automatically.

This is the distinction that trips up the most books. When an owner pays themselves outside of payroll, that money should reduce their equity through an owner's draw or a distribution account — not through retained earnings. Retained earnings keeps climbing with each year's profit; the draw account tracks what has been pulled back out. In a formal statement of retained earnings, dividends and distributions are subtracted from the ending balance, but QuickBooks does not perform that subtraction inside the account for you — the roll-up moves net income only. The draws live in their own account and are reconciled against equity separately. When someone books a draw straight to retained earnings to "keep it simple," the account stops meaning what it is supposed to mean, and untangling that is standard cleanup work, often alongside a chart of accounts cleanup that gives draws and distributions their own clean homes.

The cleaner arrangement is to let three accounts do three jobs: retained earnings accumulates prior-year profit and is left to the automatic roll-up; an owner's contribution account records money put into the business; and an owner's draw or distribution account records money taken out. Total equity is then simply the sum of those parts plus the current year's earnings, and each line can be defended on its own. When a business changes how owners are paid — say it elects S-corporation treatment and shifts from draws to a mix of payroll and distributions — keeping those accounts distinct is what lets the equity section keep telling the truth through the change rather than collapsing it all into one number nobody can explain later.

What happens at year-end depends on the entity, because QuickBooks' roll-up only touches the profit and loss — Intuit describes the account as showing “the total of your company's income and expenses from all previous years,” so draw and distribution accounts are left exactly as they are. Intuit's equity guide sets out the pattern by entity: a sole proprietor's withdrawals go to an owner's draw account, a contra-equity account; a partnership's or LLC's withdrawals reduce the partners' capital; and an S or C corporation's distributions of earnings reduce retained earnings itself. For a sole proprietor or a partnership, then, the draw account keeps growing year after year unless someone closes it into owner's or partners' equity with a journal entry once the year is final — a presentation choice for the CPA, not something QuickBooks does. For a corporation, distributions are the one routine thing that should reduce retained earnings, recorded through a dedicated distributions or dividends account rather than posted to retained earnings directly.

Why retained earnings looks wrong after a bad close

A wrong retained earnings figure is almost always a downstream symptom of a disturbed prior period, not a problem inside the account itself. Because the balance is a rolling sum of every past year, anything that changes history changes retained earnings.

The common causes each leave a recognizable fingerprint. Editing, deleting, or adding a transaction dated in a year that was already closed silently rewrites the roll-up and shifts the balance. Posting a journal entry directly to the account — to force a balance sheet to balance, or to park an adjustment — leaves a manual mark on an account that should have none. A duplicated or mis-typed opening balance inflates or deflates the starting point for everything that follows. And a close that was never truly finished — accounts left unreconciled, a fiscal-year-start set to the wrong month — feeds a wrong net income into the roll-up. This is precisely the diagnostic work of a QuickBooks year-end cleanup: reconstruct what each prior period actually was, prove net income for every closed year, and confirm that the retained earnings the software rolled up matches what the business actually earned. Our full approach is documented in the methodology.

Checking the number yourself, step by step

Before calling anyone, five checks in QuickBooks Online tell you which fingerprint you are looking at. The report steps follow Intuit's help on retained earnings details (checked October 2026).

  1. Confirm the fiscal year. In Settings → Account and settings → Advanced → Accounting, check First month of fiscal year. A wrong month moves the roll-up to the wrong date and shifts a year's profit into the wrong year.
  2. Rebuild the figure from the profit and loss. Run the Profit and Loss for All Dates through the last day of the prior fiscal year and compare its net income with the retained earnings line on the balance sheet. Intuit's explanation for a difference is that transactions affecting only balance sheet accounts may have been entered against retained earnings.
  3. List the manual entries. Run the Retained Earnings account report from the chart of accounts for All Dates. Every line on it is a hand entry — a journal entry, an opening balance, a draw posted to the wrong account — and each needs a reason.
  4. Compare each closed year with what was filed. Show the Profit and Loss by year and compare each year's net income with the tax return or the statements issued at the time. A year that no longer matches was edited after it closed; the audit log under Settings → Audit log shows who changed what, for the two years Intuit keeps it.
  5. Check Opening Balance Equity. A balance left there is often prior-year profit that never reached retained earnings, as described below.

Then protect the result with a closing date and a password. If the differences run through several closed years, that is the reconstruction a year-end cleanup does — and if you are not sure which case you have, a free QuickBooks review reads the equity section for you.

How retained earnings connects to Opening Balance Equity

Retained earnings and Opening Balance Equity are the two equity accounts most often confused, and a leftover balance in one usually explains an odd balance in the other.

Opening Balance Equity is a temporary holding account QuickBooks uses while a file is being set up; retained earnings is the permanent home for accumulated profit. When you enter opening balances for accounts during setup — or migrate a company file — QuickBooks offsets those entries into Opening Balance Equity so the books stay in balance before the real history is in place. That account is meant to be emptied to zero once setup is complete, with its contents reclassified to their true homes, and a portion of it very often belongs in retained earnings because it represents prior-year profit that was never formally recorded. A file that still carries a balance in Opening Balance Equity months or years after setup is a file whose retained earnings cannot be trusted, because the two accounts are describing the same missing history from opposite sides. The concept and the fix are covered in the Opening Balance Equity doc; the two accounts are almost always cleared together.

Where this shows up

Not sure which one your books are showing? A free QuickBooks review reads the equity section and tells you honestly.

Questions about retained earnings

Should I ever post transactions directly to retained earnings?

Almost never. Retained earnings is a system-maintained account that QuickBooks updates automatically at year-end. Posting to it by hand — to force a balance or park an adjustment — breaks the audit trail and is one of the first things a specialist unwinds in a cleanup.

Why did retained earnings change on the first day of my fiscal year?

That is the automatic year-end roll-up working as designed. On the first day of the new fiscal year, QuickBooks moves the prior year's net income out of the profit and loss and into retained earnings, so the P&L starts fresh at zero and the profit is preserved in equity.

Are retained earnings and owner's equity the same thing?

No. Retained earnings is one component of total equity — the part built from kept profits. Owner contributions, owner's draws or distributions, and common stock are separate equity accounts. Together they make up total equity on the balance sheet.

My retained earnings number looks wrong. What causes that?

The usual causes are a prior period that was edited after it closed, transactions posted directly to the account, a wrong or duplicated opening balance, or Opening Balance Equity that was never cleared. Each leaves a different fingerprint, and isolating which one is the point of a cleanup.

Do sole proprietors have retained earnings?

QuickBooks creates the account for every company file regardless of entity type, and net income still rolls into it each year. In practice, owners of pass-through entities usually track their stake through owner's equity and draws — Intuit's own equity guide describes retained earnings as mainly for corporations — but the retained earnings account still exists and still moves at year-end.

What is the normal balance of retained earnings?

Credit. Retained earnings is an equity account, so credits increase it and debits reduce it: net income closes in as a credit, and a net loss or a corporation's dividends reduce it. A debit balance on the trial balance means an accumulated deficit.

What is the formula for retained earnings?

Beginning retained earnings, plus net income or minus net loss, minus dividends or distributions paid out of earnings, equals ending retained earnings. For example, $18,300 at the start of the year plus $52,140 of net income, less $20,000 of dividends, leaves $50,440.

Can retained earnings be negative?

Yes. When a business has lost more over its life than it has kept, or paid out more than it earned, retained earnings falls below zero. That is called an accumulated deficit, and it shows as a debit balance in the equity section.

Is retained earnings the same as cash?

No. It records profit kept in the business, not money in the bank. That profit may already have been spent on equipment, inventory, loan payments or customer balances not yet collected, so a large retained earnings figure can sit next to a small bank balance.

How do I see what makes up retained earnings in QuickBooks Online?

Not from the balance sheet: Intuit says you can't simply select Retained Earnings there to view details. Run the Profit and Loss report for All Dates and select the Net Income amount, or show the report by year, to see what each year added. Run a report on the Retained Earnings account from the chart of accounts to find entries someone made by hand.

Are owner's draws closed to retained earnings at year-end?

Not by QuickBooks. The automatic roll-up moves net income only, so a draw or distribution account keeps its balance until someone closes it with a journal entry. Intuit's equity guide treats a sole proprietor's draws as a reduction of owner's equity and a partnership's as a reduction of partner capital, while a corporation's distributions of earnings reduce retained earnings. Your CPA decides how they are presented.

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