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Thread: Can negative retained earniings be "turned around" to positive?

  1. #1
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    Default Can negative retained earniings be "turned around" to positive?

    My shop launched on 2/1/2016 so I've been going for only 1.5 years. Because it's a thing I do in my spare time, and in partnership with a very risk averse husband, it's been slow going. I'm okay with that, though. My sales volume is slowly growing and I'm keeping a tight rein on expenses, so I should be consistently profitable next year hopefully. I track my numbers month to month since inception and the overall trend is upward.

    So my question is this: I only check my balance sheet twice a year. It's now showing retained earnings at negative $4000 (not exactly, but I rounded it off for this discussion). I googled what retained earnings are so I know that when they're negative it can mean:

    a. sustained losses (this is what my situation is)

    or

    b. too much money taken out of the business as stock distributions (or borrowing and then disbursing those funds to stockholders)

    Since my case is A, if I continue my growth pattern and get the thing into sustained profitability, will that negative number slowly shrink and eventually turn positive? It seems logical that it will, but I want to ask someone and make my understanding is right.

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    Assuming your business becomes consistently profitable, and you re-invest (or retain) those profits in the business, rather than taking the profits generated by the business as an "owner's draw," then yes, the retained earnings number will become less negative, eventually turning positive.

    Note that on your balance sheet, the retained earnings figure is just one of several aspects of your equity in the business....

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    Yes, negative retained earnings can become positive retained earnings. Retained earnings is an accumulation of your net income or loss. They are updated when your close your books for the year. Most accounting programs do this automatically at the end of the accounting year. Your balance sheet shows retained earnings (prior years net income or loss) and current year net income or loss. Add these together anytime during the year to see your total retained earnings. Hope this makes sense.

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    Great, thanks! It does make sense. I'm not taking a salary yet, or any profit draws, so I should be able to turn it around in a year or two, i hope. I'm also doing better this year compared to last, building some name recognition. So I'm optimistic. But it startled me to see a large (relative to my business) negative number on my reports. LOL!

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    Sounds like you could benefit from a basic accounting course.

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