Retained earnings is the equity account that accumulates net income over the life of the company, less distributions or dividends. Revenue and expense accounts are temporary: at year end a closing entry zeroes them into retained earnings, so the new year starts with only balance sheet balances.
Why it matters
Sureties look at equity (working capital and net worth) to set bonding capacity. Retained earnings that swing because of late adjustments to closed years are a red flag.
Worked example
FY2026 revenue $5,000,000, job costs $4,300,000, G&A $300,000. The closing entry debits revenue $5,000,000, credits the cost and expense accounts $4,600,000 and credits retained earnings $400,000 (illustrative).
Common mistakes
- Posting into a closed prior year, which changes opening retained earnings.
- Booking owner draws as expenses.
How os.construction handles it
In the accounting preview, reports roll prior-year profit into retained earnings for presentation. A year-end closing entry workflow is not built yet. See Close the month.