Profit for All Prior Years
BC1
Member Posts: 6
Hi, I would like to be able to adjust "Profit for all prior years" account. I can't find this when doing a Journal transaction. Please advise. Ex this is a removal of partnership profits transaction.
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Hi @BC1 , can you give me some more information around where this account is located in your Chart of Accounts? This isn't an account which is automatically created by Wave so this would have been created on your end.
Let me know where it's located and I should be able to advise as to why it's not showing up.
Well, we didn't add either so bit of a mystery then. This shows on trial balance above "total equity" and below "owner's equity". When i click on account name, it displays a net profit description i.e.
"Income - Cost of Goods Sold - Operating Expenses = Net Profit" and the total Net Profit matches the amount listed under this trial balance "profit for all prior years". Frankly this should be under retained earnings but for the life of me i don't know what / why this is happening.
Hi, to piggy back off this, I experienced the same thing last year where a Profit for all prior years shows up in my Trial Balance report and it really confused my accountant.
I also would like to know how I can make adjustments to this account because my accountant sent me adjustments this year to combine this account with retained earnings. Alternatively, is it possible to hide this "Profit for all prior years" account from the reports? Not sure of the implications of that though.
I recall in 2019 when I was generating reports for my 2018 year end, this "Profit for all prior years" account did not exist.
Thanks.
Hi @AlexL, any update on this? Thanks.
Hey @BC1 & @BillyZB , thanks for your patience while I got back to you. I followed up with a colleague to get a good idea of what exactly this account is and it turns out it is indeed an account created by Wave (my apologies on the mistake) which is basically an equivalent to a retained earnings account. Making adjustments to previous years in your accounting/Transactions page in general will have an effect on the "Profit for all prior years" account. Although there isn't a specific way to edit just that balance, making changes to past transactions will affect it.
So it is a duplicate of Retained Earnings account or a replacement? "Equivalent" seems very "unaccounting" terminology. Historically, every accounting system i've used has a Retained Earnings account and this is the way it is taught in school. I'm just trying to figure out what i should do. Can i rename it Retained Earnings? And back to my original question, if I want to adjust Retained Earnings / Profit from all prior years - how to do so? I.e. issue a dividend. Normally i'd debit Retained Earnings and credit a Dividend Payable/Cash account. How do I do this under the Profit for all prior years scenario if I am unable to directly DR/CR that account?
Hi @BC1 , it's not an actual account in Wave but more of a categorization which appears in your reporting to represent just that, the profit for all prior years. If you click into it, you'll notice it takes you to the Profit & Loss Report with your filter adjusted to represent previous financial years. This means that it's not an actual account that you can actively debit or credit.
I'm afraid we as support agents can't comment on accounting as complex as dividends or how to create retained earnings in the software so I would recommend reaching out to an accountant or CPA who can advise you on the best way to do so. We do have a blog article on how you can calculate your retained earnings which may help you out with this, and you can check it out through this link.
Hi AlexL, I would prefer that this non-account NOT show up on my real balance sheet. Does it make any sense to include an account, which by your admission is not really an account, but have it show up on a balance sheet report? It should only be retained earnings on the balance sheet.
@BC1 Did you happen to figure this out? Thanks
The only thing i can think to do at this point is try and do a retained earnings adjustment and see what happens, the whole scenario seems strange but such is life. So, in short, no i haven't figured out but will post an update once i get around to trying.
What would the entry look like to adjust retained earnings? I want to see a credit balance in retained earnings instead of this virtual "profit for all years" non-account. If I make that credit, what account can be used for the debit?
Well, I'd assume the entry would be something like
DR Retained Earnings
CR Cash/Bank
I haven't done it yet but will assume this will reduce retained earnings/profit all prior years, i might just do a test to see what happens. Just seems super odd to have another "equivalent" account that represents the exact same thing.
Any update on this? I’m having the same issue.
Hey @Darlene_McTavish53 !
At this time, no changes have been made to this functionality in Wave.
@AlexL Any updates on this? I too am frustrated with how this 'non account' shows up on balance sheet.
Wave support says there is no actual year close procedure in Wave like there is in virtually all other accounting software. In a classic year close, expense and income for the year are reset to zero as their values are transferred to Owners Equity. Also, the owner Drawings account values are transferred to Owners Equity too. That way the numbers for these accounts restart at zero each year and the income statement for the next accounting period will be correct. This process is called "closing entries" and is part of the normal accounting cycle. Most software also locks down the previous accounting period to read only. Wave lacks this feature in its security set, (In your research see Temporary Vs Permanent Accounts and Closing Entries). In Wave, you have to do the close process manually.
Instead of having a proper close procedure like other software, Wave relies on the date range entered when you create a report. The lack of a proper period close procedure (including prior years lockdown) is the single biggest flaw in Wave because it violates standard practice and the GAAP principle of Periodicity. Other than this, it is really excellent software and is truly free (amazing!). Nonetheless, this causes many users to move to QB despite the cost, complexity and learning curve of doing so. It also makes many Accountants uncomfortable. Knowing this, here are the repercussions and what you can do about it.
Many users manually close their accounting period in Wave. When you do this, you are guaranteeing that the balance sheet line item: Profit all prior years will be inaccurate.
In Wave, all entries are cumulative since there have been no closing entries. That lets them do reports accurate reports for a span greater than the accounting period.
When you DON'T close the year, Wave accurately calculates and reports all prior year's profits on the Balance sheet, but only if each year's data is correct (GIGO), but it does it in a way that can lead to odd results. When it calculates Profit for all prior years, it really only calculates profit for the PREVIOUS year and uses that amount in the Balance Sheet for Profit all prior years. Their report will be accurate because, if you run Wave their way and don't do a close, last year's profit was cumulative and therefore will be truly Profit all prior years.
Therefore, it is accurate IF and ONLY IF you follow the Wave Teams vision of NOT doing a close for the accounting period. But if you follow GAAP best practices and do a close at year end (assuming that your accounting period is a year), the Profit all prior years will actually be Profit for the previous year. If you do a close every month, it will actually be Profit for the previous month.
So, what can you do about it? If you use Waves way of doing things (not recommended), you will always have accurate balance sheet reports if you entered your transactions carefully. If you follow GAAP and do a close for the accounting period, you will always have inaccurate balance sheets (but only for the line item Profit all prior years).
Assuming that you do a close, you have these options to fix the problem:
1.) Use PDF edit software to redact the line item Profit all prior years. This is not a necessary line item on a Balance Sheet, so you can just get rid of it. It won't affect what's in Wave because it is just a calculated field for the report and is not used anywhere else by the software as near as I can determine. It's a bit of a pain and can't be automated
2.) Use PDF edit software redact the line item Profit all prior years and use typewriter function to rewrite the label for this line item to read: Profit previous year.
3.) Use PDF edit software to place a footnote on the report explaining that is actually means Profit previous year.
4.) Export the Balance sheet to CSV instead of PDF, import it into Excel and edit the report, then either save as PDF or Print to PDF. It is possible that the edits could be scripted in VBA or other scripting language to do some automation for the last few steps.
It is my sincere hope that Wave changes the way that they do things and have a proper close procedure for those of us who want the credibility, accuracy and tidy books that using GAAP provides. Also, accountants often don't like wave because it doesn't follow GAAP. I am a little surprised that H&R Block, the venerable tax accounting experts, aren't concerned about this feature. According to the responses to this issue in the Wave Community Forum, they have no plans to fix this issue. Too bad, because it is a giant flaw in an otherwise brilliant platform.
Other software packages are mostly subscription based and cost a minimum 0f $10/month. If you are new to accounting or are just getting started with your business, Wave is superb, but you do need to understand the caveat explained above. Many accounting software packages foolishly try to make accounting "easy" by oversimplifying, cutting corners or worse yet, doing single entry bookkeeping. Wave is true double entry bookkeeping and has few rivals in value for the price.
The best thing to do is spend some time learning accounting basics. If you have tried several times and struggled, just know that it is not hard. The fault lies in the absolutely terrible instruction available, not you. Apparently once you become an accountant, you lose your ability to explain anything in simple terms or give a straight answer. That said, there are a couple of really excellent sites that can teach you the basics for free. But really, if you want to run a business and enjoy the freedom that it gives you, spend a little time learning accounting. If you struggle the fault does not lie with you, just get a different instructor, most of them are horrible.
One last bit of unasked for advice. Turn all your regular bookkeeping procedures into practical systems. That way you can avoid most of the accounting deep dive. Just learn what your monthly and yearly tasks are and document them, step-by-step, in a document called Bookkeeping Procedures. That way, you will do things consistently every time. You will have more accurate information and gain credibility with other professionals and business owners. You can also then outsource your bookkeeping as you grow.