Retained Earnings

The business’s total aggregated income retained by the business at some point in time from the profits earned, like at the end of the reporting period, is termed as the business’s retained earnings. Accumulated loss or retained loss is said when the balance of the retained earnings is negative. In the accounts of retained earnings, the net earnings or the net expense at some point in time is transferred to the (P&L)Profit & Loss Account. By the matter of bonus, share capitalisation is possible with the credit balance of the account, and when the balance amount is ready for distribution to shareholders in the form of dividends. In the following period, the balancing figure in the account is carried forward.  

Retained earnings explained

At the end of one accounting period, the retained earnings closing balance will become the opening balance of retained earnings for the following period. The net earnings or the net expense for that particular period is added or deducted to that extent with those expenses, the premium on shares issued and the dividend paid etc are deducted from the balance. In the business balance sheet, retained earnings are documented in the section of shareholder’s equity. Retained earnings do not represent additional cash accessible to a company because of the characteristic of double-entry accrual accounting, rather double-entry accrual accounting represents how the business has managed its profits.  

Formula and Calculation of Retained Earnings. 

Retained Earnings= Opening balance of retained earnings (+) Amount from net income or net loss being transferred  (– ) dividends (–) other payments.  

RE =  Op Bal of RE + T/r from net income or net loss – Div – Payments. 

A company can use the retained earnings in broad possible ways. 

What are retained earnings in stockholder’s equity?  

Stockholders have positive equity when the value of the total assets is more than the total liabilities. In contrast, the stockholders’ equity becomes negative when the total liabilities value is more than the total assets. Sometimes the negative equity of stockholders is also known as stockholders’ deficit, the stockholders’ deficit doesn’t mean that the stockholders owe some money to the business as they are not responsible for the liabilities, their liability is limited to the amount of share capital only. 

Retained earnings = Opening of retained earnings + Current year net profit from profit & loss account– dividends paid in the current year.  

What are retained earnings tax implications? 

A company or business tax on the total income in a financial year is subjected to the business. After the total taxable income, the amount is added to the retained earnings, but in maximum cases, the net tax is not due on the aggregate earnings retained by the company. The business or corporate tax is primarily lowered than the marginal amounts for some individual taxpayers, creating a tax avoidance situation for the business. The business’s retained earnings increase a shareholders’ equity, which increases the shareholders’ wealth.  

Decision Factors for retaining money

A few factors affect all the decision-making processes of the profit that a company needs to retain. These factors include the following: 

1. Net profit Quantum, 

2. Duration of the company or business enterprises,

3. Corporation’s Dividend policy

4. Plans regarding development and modernisation. 

Conclusion

In a retained earnings account, the net earnings or the net expense at some point in time is transferred to the (P&L)Profit & Loss Account. By the matter of bonus, share capitalisation etc is possible of any part of the account’s credit balance, and when the balance amount is ready for distribution to shareholders in the form of dividends. In the following duration, the residue balance is carried forward.  

In the business balance sheet, retained earnings are accounted for in the section of shareholder’s equity. Other comprehensive incomes and shares in the capital, which is given in the statement of changes equity, are presented along with a report of movement in retained earnings. Stockholders have positive equity when the value of the total assets is more than the total liabilities. In contrast, when the total liabilities value is more than the total assets, the stockholders’ equity becomes negative.