What is a statement of retained earnings?

27 января 2020 by Forex Broker business-accounting.net

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Every accountant should know how to use a statement of retained earnings. Retained earnings of the company are its net profit (after tax), which has not yet been divided between the participants (shareholders) of the organization. As a result, such profits will be distributed, depends on the decision of shareholders at the annual meeting. Usually, funds are spent for the following purposes:

  • payment of dividends to shareholders (participants) of the organization;
  • formation or increase of reserve capital;
  • the performance of the remaining obligations;
  • the owners of the enterprise choose other goals.

Retained earnings are a liability because they are effectively an unfulfilled obligation to business owners. Ideally, the money should be paid as dividends to the owners and put into development. Similarly, a liability is an uncovered loss, which is indicated in parentheses because of a negative value. Retained earnings are reflected in a special line of the balance. It is the statement of retained earnings. 

Statement of retained earnings formula 

According to the statement of retained earnings, retained earnings is the Total income that was received by the enterprise as a result of economic activity, remained after taxation, and has not yet been divided by the owners or spent on business needs.

Example of the statement of retained earnings formula: LLC “Victory” in 2017 received a profit for 755 thousand rubles. Income tax amounted to 125 thousand rubles.

Accountant calculates the statement of retained earnings:

755 000 R. – 125 000 R. = 630 Tr.

This amount will be reflected in the balance. Now you know how to prepare a statement of retained earnings. 

How to prepare a statement of retained earnings

First of all, it is necessary to understand a few points that are directly related to the introduction of information in the statement of retained earnings:

The amount of net profit of the enterprise for the reporting period should be reflected in the account “Profit and loss” in accounting, and the amount of net loss.

If, after the approval of the financial statements for the current period, significant errors of the previous period have been identified, they must be corrected. Corrections are made by making entries on the relevant accounting accounts in the current reporting period. 

That is, if the company corrected significant flaws in 2014 or earlier periods by making entries in the statements in 2015, despite the fact that the 2014 financial statements have already been approved, the indicator p. 1370 the balance sheet for the reporting period of 2015, containing corrective records, should be formed taking into account the corrective record.

The amount of retained earnings should be accounted for by the final turnovers of December. The amount of net profit or loss of the reporting period should be written off.

Important! Profit distribution at the end of the period is an event after the reporting date, which indicates that after the reporting date, there were conditions in which the enterprise carries out its economic activities. In the reporting period for which the profit is to be distributed, no entries are made in accounting (neither in analytical nor in synthetic accounting). But in the next period, the accountant will make a record to reflect the event in the statement of retained earnings properly. So, information on the account “Retained earnings (uncovered loss)” in the reporting period will be formed, taking into account the decision made in the reporting year on the distribution of profits identified by the results of the previous year. Now you know what statement of retained earnings is.

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