In this video I want to share with you how do you do your closing entries
So one of the things we do at the end of every year
is we close out our equity accounts into our retained earnings
We technically do it on the first day, the next year.
And I want to walk you through how to do that
So the first thing to know is kind of how retained earnings work
and I've done a video on this before, but I thought
that'd be a great place to start
and then we could talk about equity
Alright, so to dive in, the first thing we want
to talk about is our reports and looking at our profit and loss
To understand our retained earnings, you can go under
reports, profit and loss
and then you're going to look at let's just say last year,
because a lot of times people don't understand how retained earnings work,
how they closed, how QuickBooks closes them naturally for you
So I kind of want to show you how this works
So first things first, we pull up, say last year, and we'll see we have
profitability of $91.25
So remember, a profit and loss just shows your income and your expenses
it doesn't have your equity So to look at our equity,
we are going to go to the balance sheet
Now I have mine under favorites here at the top
But if yours isn't at the top,
You're gonna find it, under a business overview. Okay,
so Profit and Loss here, and is what we pulled first
Now we're gonna look at the balance sheet So remember,
profit and loss, it's just income and expense, and balance sheet is going to be
assets, equity, and liabilities, right. So it's actually goes
asset, liability within equity, if we're going to be technical,
but well, let's keep it simple for today
So we're gonna go here, we're going to drop down last year, and we're gonna click
Run report
So as long as you have your report basis,
whether it's cash or accrual on the same, you'll notice when you
come down here at the bottom, there is our net income of $91.25
Right now, this business doesn't show that there's technically any equity here
But if you look at yours, you might see an amount
On the desktop version, we can actually double click on that amount
and it will show us but...
In the online version, it's a little extra complicated, they won't let you
so the only way to actually see that is to go under your
Accounting, Chart of Accounts.
Go down to your equity accounts,
which you'll see right here, and you'll see retained earnings and
when you click Run report. And then if you drop this down and
scroll all the way to the top and click all dates and click
Run report
you will see...
on yours the closing entries from one year to the other. Okay
So
what we're going to do is we're gonna go back over
and we're going to look at our balance sheet
and we're gonna be looking for at the end of the year
So let's say last year,
did we have any owner contribution,
any distribution because these are what are called temporary accounts
It's best to close them out
Each year. So they start fresh, and you can see exactly what's in them.
Okay, so right up here, we will see our draws.
Now we see our $91.25. If I change this by one date,
and I say January 1st,
and we run the report,
we'll come down here and we'll see now it's moved to retained earnings.
Okay
It automatically moves it from net income to retained earnings
And if we said, okay, what have we done this year,
I just kind of want you to really see this, so you see it
and you scroll down
Whatever profitability you see on your profit and loss will show up here as the current
Net income. Okay,
So retained earnings is an accumulation of the entire time you've been in business
What's happened in the prior years,
just remember that
the current year won't close in until the first day of the next year.
So one of the things that we want to do
is QuickBooks naturally does the retained earnings.
You don't need to do a journal entry for that.
But what it doesn't do is these
own, equity accounts.
So if you have opening balance, equity, or draws or
contributions, it won't close in.
So that's what I'm going to show you how to do today
How do you close that in. So you're gonna come over here,
and you are gonna go over to the plus,
that's best way to get to the journal entries and click
journal entry. Now what we're gonna do
is we're going to close out just this $1,000
and we're gonna do it on the first day of the next year
and the reason is, because we want to keep our balance sheet accurate
We don't want it
it to change this, we just want to zeroed out so it can start the next year.
So we always use the first day of the next year.
Okay, so we go the plus
Go to journal entries
We are going to choose what date here?
The first day of the new year
So we're currently in 2021
in this example,
and then we're gonna come over here and we're gonna pick our account
So equity is typically a credit-based account
So when we have draws that means we've been having it
as a negative it means that the debit balance,
right, so what we're gonna do here is we're gonna go
to owner's
Equity or draw here
and we want to zero that account out
So right now if it's negative,
it means it has more on the debit side than the credit side
So we want to add a credit.
So we're gonna add a credit for $1,000, that's going to zero it out,
okay? If you have owner contribution, it's probably
already on the credit side. So for owner...
contribution or
shareholder, depending on your entity structure, you're gonna
want a debit to reduce those. Okay?
so depends on what it is.
That's why we look at the balance sheet first,
we find out the dollar amount.
Sound good? All right, perfect.
So then we're going to go here, and we're going to move this over to
retained earnings. So what happens is retained earnings is
also an equity account, it's the accumulation year after year
after year, of what happened in the business, but if you're taking
out distribution or you're adding contribution, we'll add that
into the overall retained earnings of the business.
So you can come over here and you can enter in your closing...
Entry
You can even just say closing
owner
draws
into retained
earnings,
whatever you want to add,
and then the year that you're doing it for,
I'd recommend, okay.
And I recommend adding that to both lines
So that what?
You have the detail that you need, okay,
if you have
another equity account, like contributions or something else
you need to close out, make sure you add that.
And then you're gonna come down here, and you're going to save and close it.
So now let's look at what happened on our reports.
So now that we scroll down,
so we're going to say,
last year,
what happened?
Nothing, it's still there. Perfect, we did a good job.
The reason we do the first day of the next year is because
we don't, we want our balance sheet to stay accurate.
We just want it to be fresh for the first day of the new year
So as soon as we change this over,
and we say January 1st
of the new year,
January 1st of the New Year.
Oh, excellent. Click December there
That's okay. January 1st, you'll see.
Let me go just to the first
I just make it easier to see the report.
So we'll scroll down,
and now you'll see draws is zeroed out,
and it's moved to retained earnings now,
instead of retained earnings being a positive $98.
Once we closed, what we took out of the business are distributions or draws.
Now, the business is technically negative
as retained earnings, meaning it went into the whole.
So if we want to come over here, and we look at our chart of accounts,
and we go down to our retained earnings,
it's right here actually
and we run our report,
you're gonna start seeing what you adjusted. Now it won't on the,
on the online version it shows the closing entry
On here, it doesn't show it yet. But what it does show is the $1,000 coming back out,
okay. But when you look at your...
balance sheet, you'll see
the difference. So if you go from one year to the next year,
you'll see the difference
and you just want to say
now what happens is I want to be really clear about this.
So you kind of get some education,
the moment you start adding more days,
and there's income and expense, you'll notice your net
Income
will start adding so as soon as I say
through this year,
and I run it,
I've now added more detail.
See?
so that's where this net income comes in.
It's what happened in the current year.
but our retained earnings only changes
from one year to the next. So if I change this to
22, right, so the next year,
then what's going to happen is those retained earnings will
close into the next year. And now we have an adjustment we
start all over again on the first day of each year.
So that's how you do your closing entry
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