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I'm looking at the balance sheet for a private company that has lost money every quarter since being founded several years ago. It shows +$228k in retained earnings. Management claims that their accounting software computed this automatically.

This seems like an error to me; if there is no profit, how can there be retained earnings? Am I missing something, or is management?

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  • The retained earnings are probably calculated from "comprehensive income" (rather than net income in the income statement), which you can find in the statement of changes in equity. This discrepancy you observe is probably due to "dirty surplus accounting" where some items are excluded from the income statement. – Flux Sep 4 '20 at 21:53
  • Investopedia: What Is "Scrubbing" Items on an Income Statement? – Flux Sep 4 '20 at 21:59
  • @Flux IOW, they're playing fast and loose with accounting. – RonJohn Nov 21 '20 at 15:03
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Positive retained earnings only happen if a firm records cumulative profit. Whether from its core business (what investor love to see) or from asset sales (what investor doesn't like).

Let say we have company A that sells apparel. It has buildings and 10 branches, worth 11k each. Let say company A has zero sales in 10 years. But it sells each branch every year for 15k each. in this case, every year company A records 4k as earning and accumulate 40k for 10 years as retained earning. see? even without operate, the company could make earning but in the end, still recorded in retained earning.

so, the short answer to your question: NO

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