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Closing Equity into Retained Earnings in QuickBooks Online - YouTube
Channel: Candus Kampfer
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in this video i want to share with you
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how do you do your
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closing entries so one of the things we
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do at the end of every year
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is we close out our equity accounts into
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our retained earnings we technically do
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it on the first day of the next year
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and i want to walk you through how to do
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that
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so the first thing to know is kind of
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how retained earnings work and i've done
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a video on this before but i thought
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that'd be a great place to start
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and then we could talk about equity all
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right so to dive in
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the first thing we want to talk about is
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our reports and looking at our profit
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loss
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to understand our retained earnings so
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you're going to reports
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profit and loss and then you're going to
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look at let's just say
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last year because a lot of times people
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don't understand how retained earnings
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work
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how they close how quickbooks closes
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them naturally for you so i kind of want
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to show you how this works
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so first things first we pull up say
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last year and we'll see we have
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profitability of 91.25
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so remember a profit loss just shows
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your income and your expenses
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it doesn't have your equity so to look
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at our equity we are gonna go to the
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balance sheet now i have mine under
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favorites here at the top but if yours
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isn't at the top you're gonna find it
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under business overview okay so profit
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and loss
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here and is what we pulled first now
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we're gonna look at the balance sheet so
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remember
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profit loss is just income and expense
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balance sheet is going to be assets
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equity and liabilities right so it
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actually goes asset
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liability then equity if we want to be
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technical but
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let's keep it simple for today so we're
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going to go here we're going to drop
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down
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last year and we're going to click run
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report
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so as long as you have your report basis
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whether it's cash accrual on the same
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you'll notice when you come down here at
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the bottom there is our
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net income of 91 and 25 cents
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right now this business doesn't show
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that there's technically any equity here
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but if you look at yours you might see
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an amount
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on the desktop version we can actually
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double click on that amount and it will
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show us but
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in the online version it's a little
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extra complicated they won't let you so
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the only way to actually see
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that is to go under your accounting
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chart of accounts go down to your equity
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accounts which you'll see
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right here and you'll see retained
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earnings and when you click run report
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and then if you drop this down and
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scroll all the way the top and click all
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dates
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and click run report you will see
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on yours the closing entries from one
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year to the other okay
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so what we're gonna do is we're gonna go
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back over and we're going to look
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at our balance sheet and we're going to
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be looking for
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at the end of the year so let's say last
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year
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did we have any owner contribution any
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distribution because these are what are
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we
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called temporary accounts it's best to
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close them out
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each year so they start fresh and you
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can see exactly what's in them
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okay so right up here we will see
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our draws now we see our 91.25 cents if
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i change this by
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one date and i say january 1st
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and we run the report we'll come down
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here and we'll see now it's moved to
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retained earnings
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okay it automatically moves it from
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net income to retained earnings and if
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we said okay what have we done
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this year i just kind of want you to
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really see this so you see it
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and you scroll down whatever
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profitability you see on your profit
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loss will show up here as the current
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net income okay so retained earnings is
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an accumulation of
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the entire time you've been in business
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what's happened in the prior years
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just remember that the current year
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won't close in
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until the first day of the next year so
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one of the things that we want to do is
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quickbooks naturally does the retained
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earnings
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you don't need to do a journal entry for
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that but what it doesn't do
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is these own equity accounts so if you
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have opening balance equity or draws or
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contributions it won't close
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in so that's what i'm going to show you
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how to do today how do you close that in
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so you're going to come over here
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and you are going to go over to the plus
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it's the best way to get to the journal
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entries and click
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journal entry now what we're going to do
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is we're going to close out just this
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one thousand dollars
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and we're going to do it on the first
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day of the next year and the reason is
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because we want to keep our balance
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sheet
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accurate we don't want it to change this
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we just want to zero it out so it can
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start the next year so we always use the
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first day of the next year okay
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so go to the plus go to journal entries
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we are going to choose what date here
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the first
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day of the new year so we're currently
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in
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2021 in this example
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and then we're going to come over here
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and we're going to pick our account so
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equity is typically a credit based
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account
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so when we have draws that means we
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didn't have d
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as a negative it means it's a debit
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balance right so what we're going to do
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here is we're going to go
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to owners equity or draw
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here and we want to zero that account
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out so right now if it's negative
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it means it has more on the debit side
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than the credit side so we want to add a
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credit
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so we're going to add a credit for one
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thousand dollars that's going to zero it
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out okay
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if you have owner contribution it's
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probably already on the credit side so
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for owner
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contribution or shareholder depending on
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your entity structure
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you're going to want to debit to reduce
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those okay so it depends on
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what it is that's why we look at the
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balance sheet first we find out the
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dollar amount sound good all right
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perfect
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so then we're going to go here and we're
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going to move this over to retained
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earnings
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so what happens is retained earnings is
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also an equity account it's
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the accumulation year after year after
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year of what happened in the business
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but if you're taking out distribution or
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adding contribution we use that into the
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overall retained earnings of the
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business
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so you can come over here and you can
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enter in your closing entry
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you can even just say closing owner
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draws into retained
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earnings whatever you want to add and
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then the year that you're doing it for
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i'd recommend okay and i recommend
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adding that to both lines
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so that what you have the detail that
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you need
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okay if you have another equity account
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like contributions or something else you
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need to close out make sure you add that
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and then you're going to come down here
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and you're going to save and close it so
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now let's look at what happened
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on our reports so now that we scroll
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down so we're going to say
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last year what happened
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nothing it's still there perfect we did
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a good job the reason we do the first
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day of the next year is because we don't
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we want our balance sheet to stay
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accurate we just want it to be fresh
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for the first day of the new year so
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soon as we change this over
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and we say january 1st
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of the new year january 1st
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of the new year oh accidentally click
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december there that's okay
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jay first you'll see let me go just to
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the first
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i'll just make it easier to see the
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report so we'll scroll down
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and now you'll see draws is zeroed out
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and it's moved to retained earnings
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now instead of retained earnings being a
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positive 98
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once we closed what we took out of the
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business our distributions or draws
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now the business is technically negative
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as a retained earnings meaning
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it went into the hole so if we want to
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come over here and we look at our chart
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of accounts
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and we go down to our retained earnings
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it's right here actually
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and we run our report you're going to
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start seeing what you adjusted now it
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won't
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on the on the online version it shows
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the closing entry
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on here it doesn't show it yet but what
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it does show is the thousand dollars
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coming back out
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okay but when you look at your
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balance sheet you'll see the difference
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so if you go from one year to the next
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year you'll see the difference
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and you just want to say now what
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happens is i want to be really clear
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about this so you
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kind of get some education the moment
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you start adding
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more days and there's income and expense
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you'll notice your net
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income will start adding so as soon as i
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say
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through this year and i run it
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i've now added more detail see so that's
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where this net income comes in
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it's what happened in the current year
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but our retained earnings only changes
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from one year to the next so if i change
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this to
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22 right so the next year
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then what's going to happen is those
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retained earnings will close into the
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next year
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and now we have an adjustment we start
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all over again on the first day of each
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year
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so that's how you do your closing entry
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let me know if this helped you give me a
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thank you for being here and i look
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forward to seeing you
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inside the next tip and trick have an
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amazing day bye
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[Music]
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you
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