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This article explains why small rounding differences can appear in retained earnings when using the Statement of Income and Retained Earnings format and how to resolve them correctly.
Issue
You may encounter a small rounding difference (often £1) on your Profit and Loss statement when using the Statement of Income and Retained Earnings format, specifically flagged at the "Retained earnings at the end of financial year" line.
Cause
This discrepancy occurs because the opening retained earnings figure displayed in the accounts is derived directly from the prior year file mapping. A conflict arises if the balance for the opening retained earnings in the current year's trial balance does not match the figure shown in the prior year.
Example
The current year file will display an opening balance of £82,591 which is correct as it ties up to the prior year closing balance. However, in the current year file the trial balance account for retained earnings shows £82,590.38 which is rounded to £82,590. Because the starting point in the trial balance differs from the visual starting point in the accounts, the calculated closing balance will not reconcile.
Resolution
To correct this error, you must align the current year's opening balance with the prior year's figure:
- Identify the discrepancy: Compare the prior year's closing retained earnings figure against the balance in the current year's trial balance code (e.g., 310100 Profit and loss account/Retained Earnings).
- Post a manual journal: Process a manual journal adjustment to the retained earnings code to ensure it reflects the correct opening balance as it appeared in the prior year. This can be by way of posting a £1 journal or in some cases, will only need a matter of pence to trigger the normal rounding to round up or down accordingly.