Retained Earnings

Retained earnings is a component of owner’s equity that represents net income reinvested in the business. By recording periodic results correctly, you can track how profits and losses accumulate on the balance sheet over time.

Setting up the account

The retained earnings account is a liability type account (yellow in Bkper), grouped within Owner’s Equity.

Understanding the accounting

After an operating period, the financial result is either positive (profit) or negative (loss). This result shows up on the balance sheet as a difference: assets no longer equal liabilities plus owner’s equity. That exact difference represents the net income for the period.

Transitioning the result to the balance sheet

Moving the periodic result from the income statement to the balance sheet via the retained earnings account restores the fundamental equation — Assets = Liabilities + Owner’s Equity.

Profits increase owner’s equity — A profit is recorded to the retained earnings account, growing the owner’s stake in the business.

Losses decrease owner’s equity — A loss is recorded from the retained earnings account, reducing the owner’s stake.

Sample transactions

An operating period that ends with a profit increases owner’s equity:

Date	Amount	From Account		To Account	Description
31/12/2023	10,000.00	Income Summary	>>	Retained Earnings	Net income for the period

An operating period that ends with a loss decreases owner’s equity:

Date	Amount	From Account		To Account	Description
31/12/2023	5,000.00	Retained Earnings	>>	Income Summary	Net loss for the period

Practical tips

• Account type for the income summary — You can use either an incoming or outgoing type account. For clarity, consider using an incoming type account (green) for profits and an outgoing type account (red) for losses.
• Exclude from the income hierarchy — The income summary account should be omitted from the income hierarchy, since it would zero out the actual result.
• Keep things tidy — Place the income summary account in the lower section of incoming and outgoing type accounts. Consider grouping summary accounts into one hidden group to keep the sidebar organized.