Retained earnings is one of those accounts that most small business owners don't look at very often — until something seems off and suddenly it's hard to explain what the balance should even be.
If your retained earnings balance doesn't match what you or your accountant expected, you're not alone. It's one of the more common Balance Sheet discrepancies in QuickBooks Online files, and it almost always points to a specific, fixable problem.
Here's what retained earnings is, why it can get out of sync, and what to do about it.
Retained earnings represents the cumulative net profit (or loss) your business has earned since it started, minus any distributions or dividends paid out to owners.
Think of it this way: every year your business makes a profit, that profit either gets distributed to the owners or stays in the business. The portion that stays is "retained." Over time, these annual amounts accumulate into the retained earnings balance.
In QuickBooks Online, retained earnings has a specific behavior: at the end of each fiscal year, QBO automatically closes your net income into retained earnings. You don't have to do it manually — QBO handles it as part of the year-end process.
This automatic closing is important context for understanding why mismatches happen.
A simple way to check what your retained earnings should be:
Beginning retained earnings + net income for the period − owner distributions = ending retained earnings
Your Balance Sheet shows the ending retained earnings. If the math doesn't work out, something in one of those three components is off.
This is the most common cause. Because QBO automatically rolls net income into retained earnings each year, any change to a prior year's transactions — adding, editing, or deleting — will change that year's net income and therefore change what got rolled into retained earnings.
If you or a bookkeeper edited last year's books after the year closed, your retained earnings will be off by exactly the amount of that change.
If you still have a balance in Opening Balance Equity, that balance is essentially borrowing from (or inflating) your equity section. Because retained earnings and Opening Balance Equity sit in the same section of the Balance Sheet, an uncleared Opening Balance Equity account can make retained earnings appear wrong even when it isn't.
If distributions to owners were recorded as expenses on the Profit & Loss instead of as equity withdrawals (draws), they reduced net income rather than retained earnings directly. This understates net income and therefore understates what should have been rolled into retained earnings.
QBO uses your fiscal year setting to determine when to close net income into retained earnings. If the fiscal year end is set to the wrong month, QBO may be closing the books at the wrong time and rolling partial-year income into retained earnings.
To check this: go to Settings (gear icon) → Account and Settings → Advanced → Accounting and confirm your fiscal year start month.
Sometimes accountants make year-end adjusting entries directly to retained earnings rather than through the income accounts. If these entries weren't communicated or weren't entered in QBO, the balance will diverge from what the accountant's records show.
Go to Reports → Balance Sheet and set it to show multiple years side by side (QBO allows this with the "Columns" setting). Look at how retained earnings has changed each year. Does the change each year match your net income for that year?
For example: if retained earnings went from $50,000 to $75,000, and your net income for the year was $30,000, the $5,000 gap suggests $5,000 in distributions weren't recorded — or something else was recorded incorrectly.
Go to Reports → Profit & Loss and run it for prior years. Then compare those numbers to any tax returns or accountant-prepared financials you have for those years. If QBO's net income for a prior year doesn't match what was filed, someone made changes to that prior year's transactions.
Run your Balance Sheet and look in the Equity section for Opening Balance Equity. If it has a balance, that needs to be cleared to the appropriate equity account before your retained earnings will be accurate.
Run a Profit & Loss and check whether any owner distributions appear as expenses. They shouldn't. Legitimate business deductions are expenses; money taken out by the owner is an equity transaction.
For changes to prior year transactions: Work with your accountant to determine whether those changes were intentional corrections or accidental edits. If accidental, reverse them. If intentional, make sure they're documented.
For Opening Balance Equity: Clear the balance to Retained Earnings (or Owner's Equity for sole proprietors) via a journal entry as described in our Opening Balance Equity article.
For incorrectly categorized owner draws: Reclassify the transactions from the expense account to Owner's Draw or Owner's Equity.
For fiscal year end mismatch: Correct the setting in QBO and consult your accountant about whether any prior periods need to be adjusted.
In many cases, a retained earnings mismatch points to issues that need an accountant's review — especially if the discrepancy spans multiple years. Correcting retained earnings directly with a journal entry is sometimes done as a last resort, but it should never be the first step. Finding and fixing the root cause is always preferable.
Retained earnings is the running score of your business's cumulative financial health. A wrong retained earnings balance means your Balance Sheet — the financial statement that shows what your business is worth — cannot be trusted. That matters for loan applications, investor conversations, business valuations, and your own peace of mind as an owner.
A retained earnings mismatch is often connected to recording errors in QuickBooks Online — things like edits made to prior-year transactions after the books were closed, an uncleared Opening Balance Equity balance, or owner draws recorded as expenses instead of equity. BooksCheckup checks for common recording problems like these and gives you a free Health Score in seconds.
Check your books at BooksCheckup.com →
If recording errors show up in your Health Score, the Fix Guide ($49) explains each one and walks through suggested corrections in priority order.
This article is for educational purposes and does not constitute accounting, tax, or legal advice. For guidance on your specific situation, consult a qualified bookkeeper, CPA, or tax professional.
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