Retained earnings - it's easy

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

The purpose of any economic activity is retained earnings. This is quite natural, because its presence means an increase in the company's equity capital, which allows you to make more and more large transactions and, accordingly, leads to an increase in income in the future.

Retained earnings are the company's profits that have not been paid out in the form of dividends and are reflected in account 84 "Retained earnings".

The balance on this account, like on any other, can be negative and positive - it all depends on the receipts on the debit and credit of this account.

The credit reflects the net profit of the enterprise, and the debit reflects dividends, these two items mainly affect what the retained earnings will be. This, however, does not mean at all that it is an asset of the company, and its accumulation rather indicates that the funds received as a result of profitable activities were reinvested in production.

Let's consider an example in which a company earned 500 in 2012thousand rubles, paid in the form of dividends 300 thousand rubles. and invested 200 thousand rubles in production. Suppose that 400 thousand rubles. is the previous annual retained earnings, which allows us to report the distribution of net income for 2012.

You don't need to be great mathematicians to understand that the retained earnings of the reporting year amounted to 400 thousand rubles. In the future, the meeting of shareholders can choose independently how to dispose of it for the benefit of the enterprise.

2012 Retained Earnings Statement

Retained earnings at the beginning of 2011	400,000
Net profit	500,000
Subtotal	900 000
Dividends	300,000
Reinvestment	200,000
Retained earnings at the end of 2012	400,000

As can be seen from the calculation, 400 thousand rubles. - this is a positive account 84 "Retained earnings" at the end of 2012. This suggests that the assets of the enterprise as a whole have increased, but the proportionality of the increase in their individual types remains in question. A negative balance on this account usually occurs when the company's losses and dividend payments exceed the profit received fromoperating activities. In this case, the meeting of shareholders usually decides to reduce the share capital to overcome the deficit. A negative balance on this account is called a debit balance, and a positive one is called a credit balance, since the 84th account is active-passive in nature.

Please note that all entries on account 84 are associated with the distribution of profits by decision of the founders and participants in the management of the organization. In fact, retained earnings of the enterprise is the balance of this account at the beginning or end of a certain period. From account 99 “Profit and Losses”, the amount of profit is debited to account 84 at the end and at the beginning of the period once. The resulting net profit is distributed to pay dividends, improve working conditions, replenish the reserve fund and eliminate losses from previous years.