USA Retained Earnings, posted to Net income on 12/31 or 1/1?

[Brian Walsh]

Hi folks, I have a question about Retained Earnings. This past year, we had many adjustments to Retained Earnings and I am trying to prepare an equity rollforward which prompted a seemingly simply question which I may just be overthinking...

My question is, if a company has a calendar fiscal year, is net income closed to Retained Earnings on 12/31 of the current year, or 1/1 of the next year (say, 12:01am on 1/1)?

As we all know, in a full set of financial statements, the Equity Rollforward shows current year net income as part of current year Retained Earnings, so does the Balance Sheet, but the income statement still has all of the balances intact, they are not zero. Is this just a presentation issue whereby the Balance Sheet and Equity Rollforward are presented as though current year net income has, in fact, been closed to Retained Earnings, while the Income Statement shows the balances intact as though they have not been closed to Retained Earnings?

 

[kirby]

Great question!
Indeed, when you see a set of financial statements, the Income statement presents the accounts (temporal accounts) before they were closed to retained earnings. Meanwhile, the balance sheet shows retained earnings AFTER the temporal accounts were closed to retained earnings. It is the Schrodinger's cat of accounting! Are the income statement accounts alive or dead at the time you look at the financials?!
To your question: an automated GL will close to retained earnings on 12/31.

 

[Brian Walsh]

Great question!
Indeed, when you see a set of financial statements, the Income statement presents the accounts (temporal accounts) before they were closed to retained earnings. Meanwhile, the balance sheet shows retained earnings AFTER the temporal accounts were closed to retained earnings. It is the Schrodinger's cat of accounting! Are the income statement accounts alive or dead at the time you look at the financials?!
To your question: an automated GL will close to retained earnings on 12/31.

Great explanation, that confirms my understanding. Love the Schrodinger’s cat analogy! That actually put it in the perfect perspective, lol! To me, the answer is that this is really an issue of presentation. Thank you!!