Retained earnings in the balance sheet is Account "Retained earnings"

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the modern economy, all enterprises exist on the money received from the sale of goods, works or services. But members of the company must also have their own income from the activities of the company. For these purposes, there is a special balance line - retained earnings.

Profit and loss of the company

Any enterprise starts its activity to generate income. Members of the society expect to have additional money, regardless of whether they work in this enterprise or not. Retained earnings on the balance sheet is the remaining income of the firm after payment of all debts to suppliers and employees of the company.

However, when carrying out entrepreneurial activities, the organization may incur losses, for which the participants in the company are also responsible. The Tax Code allows you to increase the net assets of the enterprise with the funds of shareholders (participants), and the repayment of uncovered losses is also suitable. The help of shareholders (participants) is vital precisely at the moment when the company incurs losses,because it threatens bankruptcy and liquidation of the enterprise. Therefore, the coverage by the owners of the loss acts as the most frequent case of recovery of the value of the net assets of the enterprise.

Balance sheet: retained earnings as part of the capital of the organization

To clarify this aspect, let's turn to the Regulation on Accounting, which regulates the procedure for controlling financial issues in enterprises. In accordance with clause 66 of PBU, retained earnings in the balance sheet are the equity of the company. It is formed not at the expense of contributions from participants, but at the expense of the efforts of the enterprise itself, being at the same time a factor in the growth of the welfare of the organization and its owners. In other words, retained earnings are a source of equity not of external, but of internal origin.

Profits can be spent on the distribution of dividends between participants or remain in the enterprise in the form of additional capital, cash or fixed assets for further development of activities and repayment of losses.

What is retained earnings

The "Retained Profit/Loss" account is required to store information about the presence and movement of the amount of this profit or loss of the company on the company's balance sheet.

It is worth noting that the source of payment of income tax, tax sanctions is account 99 after the formation of the financial result. Retained earnings inbalance sheet - this is the source of payment of dividends, deductions to funds. In this case, we are talking about the use of net profit.

When they say that income tax, dividends are paid from net profit, meaning by the last profit after tax, this is also true. However, accounting clearly separates the formation of net profit during the reporting period and its use with the help of an account for accounting for retained earnings for the statutory purposes of the enterprise.

Disposal of retained earnings

The right to dispose of net profit belongs to the owners of the enterprise, which is reflected in the relevant regulations. The owners of the enterprise have the right to spend retained earnings for various purposes, for example, to encourage employees, charity, to finance social events, cultural and sports events, etc. However, in most cases, this profit goes either to dividends or to improve and develop the business.

The protocol of the participants of the enterprise serves as a permit document for postings on the distribution of profit. In addition, entries can be made on the basis of the provisions of the charter, if they determine the directions for the use of net profit and establish deduction standards. Any other expenses bypassing the will of the owners of the enterprise (including the so-called expenses that do not reduce taxable income) cannot be written off from the retained earnings/loss account.

Distribution of profits is carried out at the annual meeting of participants. If an enterprise distributes net profit for 2013, then the postings are made in 2014, when a meeting of participants (shareholders) is held.

Retained earnings: balance sheet and postings

So, retained earnings in the balance sheet is an active-passive account. It forms undistributed (by nature - net, that is, received after taxation) profit or uncovered loss. The debit of account 84 reduces the equity capital of the enterprise, the credit balance, respectively, increases. The right to dispose of the net profit belongs to the owners of the enterprise. Of all the other components of equity capital, profit is the freest to use, since the list of directions for its expenditure is open. However, it must be remembered that this does not give grounds for the enterprise to freely, bypassing the will of shareholders (participants), spend it on purposes not provided for by the charter and other documents of the enterprise.

In analytical accounting for account 84, separate sub-accounts should be opened, including "Accrual of dividends", "Deductions to reserve capital", "Revaluation of fixed assets", etc. It is also rational that profit (loss) be taken into account on separate sub-accounts) of the reporting year and retained earnings of the previous year. In addition, on account 84 (since the Chart of Accounts does not provide for a separate balance account), you can take into account various funds created from net profit at the initiative of the enterprise: a special fund for corporatization of employees, a funddevelopment, etc.

Retained earnings as a source of production development

It is of great interest that the Ministry of Finance, as a recommendation, proposes, as part of analytical accounting, to separately reflect that part of net profit that is directed to the development of the enterprise. As you know, the acquisition of fixed assets is made at the expense of property (cash), and there are no mandatory entries to indicate the source. This posting does not lead to a decrease in retained earnings and the size of the net assets of the enterprise. An enterprise can easily prove that fixed assets were acquired solely from profit and not otherwise. It is also possible to identify sources of financing on the basis of an analysis of the balance sheet structure. This analysis assumes that investments are primarily made from net income, secondly from long-term loans, and thirdly from other accounts payable.

The best position of profit on the balance sheet

It is more profitable for an enterprise to keep its own capital in net profit, and not in authorized or additional capital. With profit, you can quickly restore losses, replenish the authorized capital, if its minimum size is increased by law, and increase other funds as part of equity capital. The higher the amount of retained earnings, the further the enterprise is from the threat of bankruptcy, and the more optimistic its prospects are.

84 account in the hands of the chief accountant

Bconclusion it should be noted that the retained earnings account is entirely in the hands of the chief accountant. Yes, no one, except the members of the company, can dispose of the company's property, but the calculation of the organization's profit, the correct calculation of certain amounts and double entry in the accounting accounts depend only on the chief accountant. Only the chief accountant can tell the company's participants how to act correctly in a given situation, where and what amounts of retained earnings to direct.