DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Why are purchases shown under retained earnings?


#1

Hi, this is a nice accounting software but got some questions specifically regarding Purchases account. We have purchased our raw material on account for 1000.00. During posting in Manager Software using your Purchase Invoices Tab I used the Purchase Account on the suspense account column, and upon checking on the Summary, the amount that I have posted did not reflected on Purchases thus reflected on Accounts Payable and the amount was deducted to our Retained Earning balance. Is it really this way? Why does the amount did not reflected on the Purchases Account? Hope to hear something from you.


#2

Summary tab shows income & expense amounts for specific period (usually current financial year). If you have recorded your purchase in previous period, the amount will be shown under Retained earnings account only.

You can send your accounting file to support@manager.io and we will let you know the exact reason.


#3

Actually I have encountered similar problems. When I make transactions for the bank account: receiving money and spending money, all the amount was shown in retained earnings. It is very strange. Could you inform me how to solve this?


#4

As of which date have you recorded those bank receipts and bank payments? Because your Summary tab is set to show income & expenses for single day only - 2015/02/09 (today). You can click Customize button at the top to change this period to something else (typically full financial year).


#5

Hi Lubos, thank you very much for prompt reply! I have changed the period from 2015-01-01 to 2015-12-31. However, the problem remains. And I have linked the purchase invoice and sales invoice with inventory items, still this problem remains. Could you show me what to do? Or shall I send you the file to check?


#6

OK, send the file to support@manager.io


#9

I have reviewed your accounting file and I don’t see any issue. Are you familiar with double-entry accounting principles?

For example, when you receive money from customer for sales invoice, on accrual basis, this transaction will have no effect on your income.

Receiving money from customer for sales invoice into your bank account will:

  • Debit asset Cash at bank
  • Credit asset Accounts receivable

There is no income account involved.


#10

I am familiar with basic principles of double entry accounting and I like your software very much. I am just confused about the retained earnings. What should I do to get rid of this?


#11

Retained earnings is cleared when owners/shareholders/partners take money out of the company. A corporate dividend reduces retained earnings. Proprietor’s draws reduce retained earnings. Distributions of capital to partners reduce retained earnings. Manager actually allows you flexibility in how you use the account, depending on your type of organization and how you’ve set up the equity/capital accounts.

I recommend reading at this link:

as well as the other questions referenced on that page. Elsewhere, accountingcoach.com addresses proprietor’s equity accounts. Your accountant may have preferences for how you set up your chart of accounts.


#12

Thank you very much for the reply and information! We will look into that. Hope it will be all solved. Thank you!


#13

The mechanics of retained earnings is simple. The accounting equation is:

Assets - Liabilities = Equity

Equity might contain more then one account but it always contains one account called Retained earnings, so:

Assets - Liabilities = Retained earnings + Other equity

Notice there is no income or expenses in this equation. That’s because:

Retained earnings = Income - Expenses

So every time you make a sale of $100, you will essentially increase your retained earnings. Retained earnings is a permanent account where every income or expense flows into.

What @Tut mentioned is that from time to time (usually once a year), you take the balance in Retained earnings and move it elsewhere otherwise it would keep accumulating profit of the business forever. So profit gets distributed, either to shareholders or allocated to partners, beneficiaries or owner’s equity (depending on business structure). For some legal entities, you actually must do this by law. For example, if you are a partnership, you must distribute profit to partners (aka clear retained earnings account). The reason for it is that partnership doesn’t pay income tax, it’s the individual partners who pay it so the tax authority wouldn’t let you accumulate retained earnings in partnership. If you are a company, you don’t have to distribute retained earnings to anyone as companies usually pay the tax on their earnings so tax authorities couldn’t care less. But you don’t need to worry about any of this, it’s up to your tax accountant to decide what to do with the balance in retained earnings. I’m only trying to explain it is part of accounting equation and you “don’t just get rid of it because you don’t like it”


#14

hello lubos, excellently explained. thank you!