In the modern economy, all enterprises exist on money received from the sale of goods, works or services. But members of the company must also have their income from the activities of the company. For these purposes, there is a special line of balance - retained earnings.
Profit and loss of the company
Any company begins its activities to generate income. Members of the company expect to have extra money, regardless of whether they will work at this enterprise or not. Retained earnings in the balance sheet is the remaining income of the company after paying all the debt to suppliers and employees of the company.
However, in carrying out entrepreneurial activities, the organization may incur losses, for which members of the company are also responsible. The tax code allows you to increase the net assets of the enterprise by the means of shareholders (participants), and the recovery of uncovered loss is also suitable. The help of shareholders (participants) is vital precisely at the moment when the company incurs losses, as this threatens bankruptcy and liquidation of the company. Therefore, owners' coverage of the loss appears as the most frequent case of recovery of the net assets of the enterprise.
Balance sheet: retained earnings in the capital of the organization
To clarify this aspect, we turn to the Accounting Regulation, which regulates the control of financial issues at enterprises. In accordance with paragraph 66 of PBU retained earnings in the balance sheet is the equity of the company. It is formed not at the expense of contributions of 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 is a source of equity not of external, but of internal origin.
The profit obtained can be spent on the distribution of dividends between participants or remain at 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 earnings / loss account is required to store information about the presence and movement of the amount of the given profit or loss of the company on the balance sheet of the enterprise.
It is worth noting that the source of payment of income tax and tax sanctions is account 99 after the formation of the financial result. Retained earnings in the balance sheet is a source of payment of dividends, contributions to funds. This is about using net profit.
When they say that income tax, dividends are paid at the expense of net profit, meaning the latter 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 account for retained earnings for the statutory goals of the enterprise.
Retained earnings
The right to dispose of net profit belongs to the owners of the enterprise, which is reflected in the relevant standards. The owners of the enterprise have the right to spend undistributed profit 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 a business.
The permissive document for the postings on the distribution of profit is the protocol of the participants in the enterprise. In addition, entries can be made on the basis of the provisions of the charter, if they determine the use of net profit and set standards for deductions. Any other expenses bypassing the will of the owners of the enterprise (including the so-called expenses that do not reduce taxable profit) cannot be deducted from the retained earnings / loss account.
Profit distribution is carried out at the annual meeting of participants. If the company distributes the net profit for 2013, then the postings are made in 2014, when the 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 unallocated (by nature - net, that is, received after taxation) profit or uncovered loss. The debit of account 84 reduces the equity of the enterprise, the credit balance, respectively, increases. The right to dispose of net profit belongs to the owners of the enterprise. Of all the other components of equity, profit is the most free to use, since the list of directions for spending it 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 stipulated by the charter and other documents of the enterprise.
In analytical accounting, separate sub-accounts should be opened for account 84, among which are “Calculation of dividends", "Contributions to reserve capital", "Revaluation of fixed assets", etc. It is also rational that separate sub-accounts take into account profit (loss) of the reporting year and undistributed last year's profit. In addition, on account 84 (since a separate balance sheet is not provided by the Chart of Accounts), one can take into account various funds created from net profit on the initiative of the enterprise: a special fund for the corporatization of employees, a development fund, etc.
Retained earnings as a source of industrial development
Of great interest is the fact that the Ministry of Finance recommends, within the framework of analytical accounting, to separately reflect that part of the net profit that is directed to the development of the enterprise. As you know, the acquisition of fixed assets is carried out at the expense of property (cash), and there are no compulsory transactions at the direction of 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 exclusively at the expense of profit, and not in any other way. Identify sources of funding can also be based on the analysis of the balance sheet structure. This analysis implies that investments are primarily made from net profit, secondly from long-term loans, and thirdly from other payables.
The best profit arrangement on the balance sheet
It is more profitable for an enterprise to maintain its own capital precisely in net profit, and not in authorized or additional capital. Profit can quickly recover losses, replenish the authorized capital, if its minimum size is legislatively increased, and other funds in equity are increased. The higher the retained earnings, the farther the enterprise is from the threat of bankruptcy, and the more optimistic its prospects.
84 account in the hands of the chief accountant
In conclusion, it should be noted that the retained earnings account is completely in the hands of the chief accountant. Yes, no one, except members of the company, can dispose of the property of the company, but only the chief accountant depends on the calculation of the organization’s profit, the correct calculation of certain amounts and double entry on the accounts. Only the chief accountant can tell the participants of the company what to do in a given situation, where and what amounts of retained earnings to send.