Retained Earnings Account

Proprietorship

Account > Retained Earnings - Previous year

I want to get a better understanding regarding this account.

Does this account accumulate over the business years or should it be cleared at year end?

Regarding Owner's Withdrawal Account - I clear this account at year end to Owner's Contribution Account, correct?

Thank you
Ann Marie






Hi Ann Marie,

Your equity section of the balance sheet for a proprietorship should look something like this:

Owner's Equity or Owner's Capital (parent account)
Owner's Contributions (sub account)
Owner's Draws or Owner's Withdrawals (sub account)
Net Income (Loss) (parent account)


When you close your books, the two subaccounts and Net Income account are journaled to the parent account Owner's Capital on January 1 (in QuickBooks, not sure how Simply handles closing entries). This ensures you start your year with a zero balance in the "closed" or temporary accounts.

Retained Earnings is really an account for corporations and yes it does represent their accumulated earnings since business inception. In a sole proprietorship, the Retained Earnings account should be renamed to Owner's Capital.





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