Wave Accounting is a great free tool for small businesses. But sometimes, what you see on your reports can be, well, puzzling. One common issue that causes confusion is when the Retained Earnings line on your Balance Sheet shows a negative number.
Why is that happening? Is your business actually in trouble, or is something else going on?
Let’s have some fun and break this down into simple terms.
TL;DR (Too Long, Didn’t Read)
Wave sometimes shows negative retained earnings because of wrongly posted entries or missing data. It doesn’t always mean your business is failing. A simple ledger adjustment—correcting the wrong entries—can bring everything back to normal. Fix the past, and your balance sheet will smile again.
What Are Retained Earnings, Anyway?
Before we jump into why they could be negative, let’s quickly explain what retained earnings are.
Retained earnings are the profits your business has kept after paying out expenses and distributions.
Here’s a simple formula:
Retained Earnings = (Total Profits - Dividends) + Past Retained Earnings
It’s your company’s piggy bank. Except instead of coins, it’s accounting numbers showing what you held onto.
Why Would They Go Negative?
If your reports in Wave Accounting show that retained earnings are negative, it’s time to dig deeper.
Here are a few possible reasons:
- Your business lost money: Maybe expenses were higher than income.
- Misposted transactions: You may have recorded equity items in wrong accounts.
- Historical losses: You started the year with a loss already carried forward.
- Manual journal entries: Adjustments made manually might have skewed the numbers.
Let’s look at a fun example to bring this to life.
Meet Lisa, the Cupcake Queen
Lisa opened a small cupcake shop. She used Wave to track her sales and expenses.
In her first year, she made $10,000 in sales and had $12,000 in expenses. That’s a net loss of $2,000.
So far, so good. Her retained earnings at the end of the year were negative $2,000. Makes sense, right?
But then in Wave, Lisa noticed that her retained earnings were suddenly showing negative $5,000.
Wait, what?
She made no big changes, no giant purchases. Something wasn’t right.
The Mystery Ledger Entry
Lisa looked into the Equity section of her balance sheet. She saw a journal entry added manually for $3,000—debiting Retained Earnings and crediting Owner’s Drawings.
Bingo! That was the problem.
That journal entry wasn’t reflecting a real owner’s distribution—it was just an adjustment made to fix a wrong category from a prior transaction. But instead of fixing something, it created a new issue.
Now, Lisa’s retained earnings had dropped by $3,000 more than they should have.
How the Adjustment Fixed Everything
Here’s what Lisa did next:
- She went to her Chart of Accounts and located the Equity section.
- She opened that mystery journal entry.
- She corrected the transaction, moving the amount to the right equity account (like Owner’s Contributions instead of Retained Earnings).
Result?
Her Balance Sheet now reflected accurate figures. Retained Earnings were back to negative $2,000—just as they should have been.
Common Ledger Fixes to Restore Equity
If this happens to you, you don’t need to panic. Here are a few tips:
- Review all manual journal entries: Did you touch Retained Earnings by mistake?
- Check equity draws or contributions: These should go to specific equity accounts, not directly to Retained Earnings.
- Run a trial balance: Use this Wave report to catch uneven or unbalanced entries.
- Consult with a bookkeeper: If you’re unsure, a professional can help with just one session.
Remember, Retained Earnings don’t usually update in real-time with every transaction. That’s why Wave moves net income to retained earnings when a fiscal year changes. Manually changing it in-between can cause problems.
It’s Also About Timing
Let’s not forget how date ranges affect your reports. If you run a Balance Sheet report as of today versus December 31st, the Retained Earnings may look different.
That’s normal! Why?
Because profit from this year hasn’t been transferred yet—it still shows as Net Income.
Once the fiscal year ends, Wave moves that income to Retained Earnings. So don’t jump to conclusions too fast based on mid-year reports.
A Checklist for Next Time
Here’s a simple checklist for keeping retained earnings in check:
- 💡Don’t manually adjust Retained Earnings unless absolutely necessary.
- 📅Use correct fiscal dates when viewing reports.
- 🎯Post owner’s draws and contributions to their specific accounts, not Retained Earnings.
- 🔍Double-check journal entries before saving.
Wrapping It Up
Wave is smart, but it’s only as accurate as the data you feed it. Most of the time, when Retained Earnings go negative, the cause is a few wrong entries—not the end of the world.
With a little sleuthing through your ledger and some smart adjustments, you can clean things up fast.
So don’t worry. Even if things look upside down right now, all you need is a bit of accounting magic (and maybe a cupcake or two) to make it right again.
Now go make numbers behave!