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A Catch in QuickBook, Dividend and Retained Earnings

19 June, 2008 (18:15) | Quickbook | By: Cecilia Leung

Quickbook claims that you do not need to close the book, it will automatically close it for you.  It is only partially true.  A lot of my clients were shocked when they see their Retained Earnings and their Dividend Paid or Owner’s Draw account from their balance sheet to be double or triple the actual amount they paid out to themselves, and certainly they do not have that much retained earnings left over to spend!

What is Retained Earnings?
Retained Earnings in short, is the left over money you can spend on your business. It is the earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payment.

When Quickbook closes your reporting period, it resets your net income for the new year and sets your net income to 0, and add / subtract this income / loss from last year to this year into your retained earnings account. It is the correct action to close the book for year end.

So what happened to the owners’ draws or dividends already paid out to shareholders? Quickbook does not do that. So we need to close the book manually to yield the correct Retained Earnings amount. The reason Quickbook does not close those accounts for you, is because owners’ draw and dividends accounts are often set up differently. For example, you may want to set up an owner’s draw account for each owner. It is also common to set up dividend accounts for each different class of shareholders. To ensure this flexibility, Quickbook does not create these account automatically in Quickbook, they need to be created manually. Therefore, Quickbook will not know how to close your book with these extra accounts.

How to close the book manually in Quickbook to correct Retained Earnings account

Example:
Your Current Period: Feb 1, 2006 – Jan 31, 2007
Dividend Paid: -35000
Net Income: 50000

You Last Period Retained Earnings (RE): 9000

You current year RE = Net Income + Last period RE – Dividend Paid = 50000 + 9000 -35000 = 24000

Now we come back to Quickbook. Your balance sheet report from your current period should have the following:

Dividend Paid: -35000
Net Income: 50000
RE: 9000

If you go one day further, and retrieved your balance sheet as of Feb 1, 2007, you should see the following:
Dividend Paid: -35000
Net Income: 0 (or any additional income you entered into the system on Feb1, 2007)
RE: 59000

Now this is only half the story, as you can see it doesn’t subtract your dividend paid so you can start your dividend paid from 0 for the new year. This will result in large amount of dividend paid throughout the years your business operates, so we need to close the dividend paid account.

Closing Dividend Accounts
Here’s how:

Make a Journal Entry in QB (Accountant -> Make General Journal Entries)

Choose the first day after your last period, in this case it is Feb 1, 2007
Increase (Debit) Dividend Paid by 35000 (This will increase the dividend paid to zero out the amount)
Decrease (Credit) Retained Earnings by 35000 (This will decrease the amount from RE where you paid out those amounts to yourself, hence no more in the business)

That is it! It is that simple.

Need Quickbook Help? We have Certified Quickbook ProAdvisors to help you, remotely, on the phone or face-to-face. Call us today: 416-628-2036 or email us at info@wizebiz.ca

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Tags: Quickbook, Retained Earnings

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