I work for a non profit. We produce a P&L with an attached budget each month. On the P&L is a line item for membership loans where both interest and principal are posted through the fiscal year. At the end of the year the statement is not adjusted but the interest and retained earnings are adjusted on the balance sheet. Is this correct?

A P&L deals with earnings not equities, if you include all cash flows it becomes a statement of income and expenditure which is a valid report for a non profit but equity cash flows should not be included in a P&L. The thing that distinguishes a P&L from a cash flow statement is the adjustments needed to match revenues with expenditures and the recognition that part of the working life of assets has been extinguished

Not really. A membership loan should not appear on the P&L. The loan (I assume the non-profit is loaning the money not borrowing it) is an asset to the company that should be listed in the chart of accounts as a receivable (either current or long term asset). It is not income. The interest received is an income item that would appear on the P&L.

What adjustment is being made to retained earnings at year end?

I'm not going to argue with you I have made the point. A P&L has a specific purpose; to calculate an accounting profit, A statement of income and expenditure or a cash flow statement is an entirely different statement which has a different purpose. In a non profit enterprise profit or loss isn't a concept which is important, what is important is whether cash flows are adequate and what sourse they come from is somewhat academic. A balance sheet is where equities are expressed and liabilities acknowledged