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RETAINED EARNINGS

Santosh Hegde – 54Vivek Prajapati – 55

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In accounting, retained earnings refers to the portion of net income, which is retained by the corporation rather than distributed to its owners as dividends.

Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit.

Retained earnings and losses are cumulative from year to year with losses offsetting earnings.

RETAINED EARNINGS – DEFINITION

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RETAINED EARNINGS

Instead of distributing the entire profits to the shareholders, company retains some profits for the purpose of-

Accumulations of earnings

Investment in fixed assets

To meet working capital needs

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MERITS OF PLOUGING BACK OF PROFITS

TO THE COMPANY-

Economical

Efficiency and productivity

Confidence of shareholders

Enhances creditworthiness

Less financial risk

Repayments of debentures &

term loans

Reduce the reliance

Helps expansion and

diversification

Helps automation and

modernization

Used to meet working capital

needs

Follows a stable dividend policy

Freedom to take their own

decisions

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MERITS OF PLOUGING BACK OF PROFITS (Cont…)

TO THE SHAREHOLDERS-

Appreciation in share values

Bonus shares

Regular dividends

Security value

TO THE SOCIETY-

Increases capital formation

Helps speedy development

Benefits to the consumers

Social welfare of activities

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Retained earnings are reported in the shareholder’s equity

section of the balance sheet.

Companies with net accumulated losses may refer to

negative shareholder’s equity as a shareholder’s deficit.

A complete report of the retained earnings or retained losses

is presented in the statement of retained earnings or

Statement of Retained Losses.

RETAINED EARNINGS – SYNOPSIS

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FOR EXAMPLE

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The calculation is:

+ Beginning retained earnings

+ Net Income during the period

- Dividends paid

= Ending retained earnings

The retained earnings formula is also known as the retained earnings

equation

RETAINED EARNINGS – CALCULATION

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For e.g., ABC International has $500,000 of net profits in its current year, pays out $150,000 for dividends, and has a beginning retained earnings balance of $1,200,000. Its retained earnings calculation is:

+ 1,200,000 Beginning retained earnings+   500,000 Net income-    150,000 Dividends= 1,550,000 Ending retained earnings

FOR EXAMPLE

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