Retained Earnings represent the health and growth of your business over its entire history.
This guide explains how QBM (as a modern ERP) automatically ensures your Balance Sheet stays accurate
without the need for manual year-end closures. It is suitable for audits, reconciliations, and internal review.
1. What are Retained Earnings?
Retained Earnings are the cumulative net profits or losses your business has kept since day one,
minus any money paid out to owners (dividends / distributions).
Think of Retained Earnings as a "Company Savings Account".
While your Profit & Loss statement shows performance for a specific period (month, quarter, or year),
Retained Earnings show your total accumulated result over the life of the company.
In accounting terms, Retained Earnings are the bridge between your Income Statement (Profit & Loss)
and your Balance Sheet.
2. The "Virtual Close" Method (Dynamic Calculation)
In older systems, you often had to manually “close the year” to move profits to Equity.
QBM uses a Virtual Close, which is a real-time calculation based on posted transactions.
This eliminates manual rollover entries and reduces the risk of human error.
Key Advantage:
Your Balance Sheet is always up-to-date. If you enter a missing invoice from last month or last year,
Retained Earnings update automatically through the same reporting logic.
The calculation has two parts:
A. Historical Net Profit or Loss (from day one to the report date)
QBM identifies “temporary” Profit & Loss account categories and sums their activity up to the report date, including:
- • Income / Revenue
- • Cost of Goods Sold (COGS)
- • Expenses (salaries, rent, utilities, operating costs, etc.)
- • Other Income & Other Expense (interest, gains/losses, etc.)
B. Manual Adjustments & Distributions (posted directly to Retained Earnings)
QBM also reads the balance of the Retained Earnings account in your Chart of Accounts.
This balance can legitimately include direct equity movements such as:
- • Dividends / Owner Distributions (journal entries)
- • Opening Balances (especially after migration from another system)
- • Prior Period Adjustments (equity corrections posted directly to Retained Earnings)
3. The Formula & Example
The number you see on your Balance Sheet follows this logic:
Example (illustration only):
| Category |
Amount |
Impact on Equity |
| Total Lifetime Revenue |
$500,000 |
Increases Equity (+) |
| Total Lifetime Expenses |
$300,000 |
Decreases Equity (—) |
| Dividends Paid (Manual Entry) |
$50,000 |
Decreases Equity (—) |
| Current Retained Earnings |
$150,000 |
Balance Sheet Value |
Technical Note:
In QBM's internal calculation, Income accounts carry credit (negative) balances and Expense accounts carry debit (positive) balances.
QBM sums Profit & Loss balances across all historical periods to arrive at Net Profit or Loss, then adds any manual journal entries
posted directly to the Retained Earnings account itself.
4. Why This Approach Is Reliable
Customers often ask, “Why didn’t I have to run a year-end closing entry?”
The reason is that QBM performs a Virtual Close automatically through reporting logic.
-
Always in Balance
Because the calculation is performed dynamically, Assets will always equal Liabilities + Equity (for the report date).
There is no dependency on manual closing entries to keep the Balance Sheet in balance.
-
Accuracy Across Years
You can run a Balance Sheet for any date (past or present), and QBM will compute the accumulated profit up to that date.
This is valuable for trend analysis and comparative reporting.
-
No Manual Rollover Risk
Manual year-end closing entries are a common source of human error.
QBM reduces this risk by computing the results consistently from posted transactions.
-
Updates When Late Entries Are Posted
If a valid backdated entry is posted in an open period, QBM will reflect its impact automatically through the same calculation logic.
Important Note:
While QBM calculates Retained Earnings dynamically, you should still follow proper period closing procedures to lock down historical periods
and prevent unauthorized changes to closed fiscal periods.
5. Frequently Asked Questions
“I’m migrating from another system. How do I enter my opening balance?”
When starting with QBM, create a Journal Entry to post your previous system’s final Retained Earnings balance
to the Retained Earnings account in your QBM Chart of Accounts.
QBM will add this starting figure to all future profits it calculates.
“How do I record a dividend or payout?”
Record a Journal Entry: Debit Retained Earnings and Credit Bank (or the payout account).
QBM will automatically reflect this as a reduction in equity.
“Why is my Profit & Loss empty at the start of the year?”
This is normal for period-based reporting. Your prior-year results are reflected in Equity (Retained Earnings) on the Balance Sheet.
Your Income and Expense accounts show the performance for the selected reporting period, helping you track this year’s activity clearly.
6. Summary for the Auditor
If an auditor asks how the Retained Earnings figure is derived, you can explain:
- • QBM performs a Virtual Close (dynamic retained earnings calculation)
- • QBM aggregates all historical Profit & Loss activity (income and expenses) up to the report date
- • QBM combines that aggregate with direct equity movements recorded in the Retained Earnings account (dividends, opening balances, adjustments)
This ensures the “bottom line” of the company’s full history is always reflected in Equity without relying on manual year-end rollover entries.
The calculation is transparent, auditable, and based entirely on posted transactions.
How the QBM Engine Works (Power Users):
Internally, QBM follows standard accounting sign conventions:
- Income/Revenue are Credit balances (often represented as negative numbers in the database).
- Expenses are Debit balances (often represented as positive numbers in the database).
QBM dynamically sums Profit & Loss balances across all historical periods, then adds any manual balances found in the account designated
as “Retained Earnings.” This ensures mathematical accuracy and a Balance Sheet that remains in balance (Assets = Liabilities + Equity).