Even the most successful enterprises need development. In turn, development needs certain cash investments, the main source of which, as a rule, is profit. The use of profit opens up the widest opportunities to the owners of the enterprise. They are not limited in the payback periods of the project, they are not forced to report to third-party investors, they can independently determine the size of the allocated amount, etc. The only disadvantage of using profit is a reduction in the amount of dividends, however, taking into account the growth of profit in subsequent periods, the owners of the enterprise are ready to take such a step. That is why the “retained earnings” account accumulates quite large amounts, and accounting for retained earnings, both accounting and management, is an integral part of the company.
By the way, it is calculated quite simply retained earnings. Its formula consists of three main indicators: net profit for the year, from which it is necessary to deduct the dividends paid to shareholders and add retained earnings that have accumulated over previous reporting periods. In the future, the retained earnings indicator may also decrease if the funds accumulated in this account are recounted as contributions to the authorized or additional fund, as well as various kinds of reserve funds.
This is the main accounting of retained earnings. Based on the accounting data, the enterprise managers decide on what to do with retained earnings accumulated over the year or several years on the corresponding 84 account. In fact, the use of retained earnings can be carried out in three main directions.
The first direction is, as already mentioned, the payment of dividends. In this case, the 75th account is credited, in debit with, of course, the 84th account. An enterprise may, depending on the agreed dividend policy, distribute all retained earnings between owners and shareholders at any time. However, this is done extremely rarely, because in this case the enterprise is deprived of one of the main sources of financing, which may adversely affect its further development.
The second area is covering losses from previous years. In this case, the 84th account will have a credit balance at the beginning of the reporting year, and, therefore, after making profit in the current year, it will be able to go into debit. Thus, there are no real opportunities to pay dividends, however, the fact that the company was able to pay its losses should inspire shareholders with confidence in its success in subsequent periods.
The third area in which retained earnings are recorded is its allocation to various types of funds, and such accounts as 80, 82 and 83 are credited. Profits can be increased by the authorized capital, and also be deferred as a reserve in case of revaluation of company assets , occurrence of insured events, etc.
And finally, the last option that needs to be considered is the accumulation of profit on the 84th account. In this case, the profit remains in the company as a source for its assets, which may be new equipment, shares of other companies, cash, etc. In most cases, the company chooses this path. Do not forget that accounting for retained earnings on the 84th account, which accumulates impressive amounts there, is a good sign of the financial well-being of the company and a signal to potential lenders and investors that the company is truly on the path of development and progress.