Applying prior year payment to invoice in desktop

Hello there, @Bromeliad. Applying a payment to an invoice typically does not affect Retained Earnings unless that payment or invoice was originally recorded using a Cash Basis reporting method or if the dates of the transactions were modified. I recommend reviewing the Reporting method used and comparing it with the Accrual basis to track the errors.

Retained Earnings is a cumulative account that represents your total net income from all previous years. If there are changes here while preparing your 1120S, it is likely due to your Cash Basis reporting, discount or credit adjustments, or inventory items or sales tax from a closed period involved.

If your QuickBooks or TurboTax is set to Cash Basis, income is only recognized once payments are applied. Applying prior-year payments now may have triggered income in 2024 or 2025, which could alter your opening Retained Earnings. Additionally, using 'Write off remaining balance' or 'Discount' creates adjustments. If these are backdated, they will adjust your prior-year net income and be rolled into Retained Earnings.

You can run the Retained Earnings QuickZoom to see exactly which transaction caused the jump. Here's how:
 

1. Open your Balance Sheet as of the last day of the prior fiscal year.
2. Double-click the Retained Earnings amount.
3. Look for any transactions dated in 2025 or any clearing entries that appeared recently.

Comparing the Accrual with Cash basis method also provides a clearer view of the situation since TurboTax for 1120S often requires the Book Balance Sheet to match your internal records. Here's how:
 

1. Go to Reports and then Company & Financial
2. Select Balance Sheet Prev Year Comparison.
3. Toggle between Accrual and Cash at the top. If the Retained Earnings only shifts on the Cash report, you know the issue is the timing of when those payments were applied to the invoices.

When inputting your Schedule L (Balance Sheet) into TurboTax Business, your beginning-of-year Retained Earnings must match the end-of-year Retained Earnings from your 2024 filed return. If your 2025 QuickBooks file shows a different number, you should create a Journal Entry dated the first day of your 2025 fiscal year to adjust Retained Earnings back to the tax-filed amount. You can also work with an accountant to ensure the accuracy of your books and to prevent errors from happening within your data.

If you have other questions about the program, please don't hesitate to click the Reply button below.