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Closing Y/E distributions to retained earnings

Started by Michael Hinze -   in Accounting

Is there an option to auto-close year-end distributions to RE? I thought I was done with the QuickBooks-like 1/1 journal entry to manually close year-end distributions to retained earnings (the only American accounting program requiring this, and I've used them all).
Xero is a date driven system and doesn't require any specific procedure to close off the year. If your year end is 31 December and you run a P&L as at that date it will show you all the income and expense balances. If you run it at 1 January and, assuming you've not entered anything for the new year, the P&L will show zero balance and the Balance Sheet retained earnings will include the prior year net income.

It is recommended once all transactions have been processed for the year that you lock the period so no further transactions can be added or edited.

However, if you mean that you need to distribute the net income to the shareholder employees, partners etc at year end then you do need to prepare a manual journal to debit expense, credit shareholder accounts. This will then bring the P&L to Xero.

Margaret Haines  

Thank you but I am addressing closing out the year's shareholder distributions, and not net earnings. It appears that without a manual journal entry the distributions account will grow as the years progress. My question is why the current year shareholders distributions are not handled similar to net earnings meaning if you run a 1/1 trial balance the distribution account will show a $0 balance (similar to the prior year net earnings).

Michael Hinze  

You will need to do a journal entry to close Distributions.

Nancy Leach  

Xero isn't designed like that -the reports are set to take the net movements of the shareholder accounts.

If you journal the distributions it will more than likely mess up the opening/closing balances of your shareholder reports.

Basically you just have to put up with the ever increasing account balances.

Jeremy Fong  

Jeremy, Thank you for your insight. In the States distributions are rolled into Retained earnings at year end resulting in published equity commonly as common stock, paid in capital and retained earnings. This approach follows the form used by the IRS tax forms 1120 and 1120S.

But I follow your logic as it makes more sense to have distributions stand on its own. After all distributions are emphatically not earnings. It also offers a clearer picture to the owner as to corporate funds withdrawn to date.


Michael Hinze