This help file explains how COSTAR handles Retained Earnings and what happens during an end of year update. Within this document any reference to a year is the financial year.
COSTAR calculates the Retained Earnings each time a financial batch containing either an expense or revenue General Ledger (GL) is posted. This means that the system is reporting on accurate figures and a user doesn’t have to wait until an end of year update to see accurate Retained Earnings figures.
Because COSTAR is a double entry system for every debit entry there is a credit entry. Given that Retained Earnings is updated every time a batch containing an expense or revenue is posted, there needs to be another entry to maintain a balanced trial balance. The other entry goes to a GL called System Income Clearing to balance the value going to the Retained Earnings. The entries to Retained Earnings and System Income Clearing are generated by the system.
E.g. A journal is processed as follows and then posted.
DB Computer Expense (E) $250
CR Rebate (R) -$100
CR Bank Account (A) -$150 [Revenue (-100) + Expense (250) = 150]
Costar will generate a system journal in the same batch as follows;
DB Retained Earnings $150
CR System Income Clearing -$150
This means that at all times the net total of all revenue and expenses for the current year will equal the Retained Earnings balance and the negative balance of the System Income Clearing for the current year.
The Retained Earnings This Year on the Balance Sheet should be equal to the Profit(Loss) on the Income Statement. The Retained Earnings This Year figure should also be the negative of the System Income Clearing balance.
As Retained Earning is updated with each expense or revenue entry, at the end of a year when COSTAR clears all revenue and expense values, the other side goes to the System Income Clearing GL, not Retained Earnings as it has been already updated.
The simple trial balance below illustrates the changes to a trial balance after a year end has been processed. Revenue and Expense lines are cleared to System Income Clearing and Asset and Liability balances become the opening balance of the new year.
| General Ledger Account | Bal @ last day of financial year | Bal @ first day of new financial year |
|---|---|---|
| Sales Inventory (R) | -15000 | 0 |
| Sales Services (R) | -5000 | 0 |
| COS Inventory (E) | 11000 | 0 |
| Salary (E) | 3000 | 0 |
| System Income Clearing (E) | 6000 | 0 |
| Inventory (A) | 10000 | 10000 |
| Bank (A) | 2000 | 2000 |
| Accounts Receivable (A) | 50000 | 50000 |
| Accounts Payable (L) | -56000 | -56000 |
| Retained Earnings (L) | -6000 | -6000 |
The Retained Earnings GL should only be manually changed if the other side of the journal is going to an asset or liability account, and only if it is for a previous year. If processed otherwise the Income Statement and Balance Sheet will no longer balance.
If the Retained Earnings for the current year needs to be changed, it means that either something has not been processed or it has been processed incorrectly. The change needs to be accounted for by processing a journal with at least one expense/revenue GL included. The other side of the journal will be to an asset/liability account. The Retained Earnings GL does not need to be touched manually as the system generated journal will affect the Retained Earnings GL automatically.
The System Income Clearing account should never be touched manually. The only transactions that should affect this account should be system generated.
When posting batches back into previous years the following behaviour occurs;
Revenue & Expense GLs: The change flows through each periods opening and closing balance until the end of the year the batch was posted to
Liability & Asset GLs: The change flows through each periods opening and closing balance until the end of the current year