At the end of the reporting period, each enterprise, organization will summarize its activities. As a result, net profit or loss is determined. The second option speaks of the incorrect organization of the company’s activities, inefficient management and requires careful, in-depth, comprehensive adjustment of processes in the course of further activities. If a company makes a net profit, it can distribute it in accordance with its needs. This affects the further development of the organization. Where can I use retained earnings, how does this affect the company? These issues will be discussed later.
What is included in the concept
Where can I use retained earnings? To understand this, you need to consider the nature and features of its accrual. This income is also called accumulated profit. She remains at the enterprise after paying all taxes, fines, other obligatory payments. The concept presented also intersects closely with net profit.
Profit requiring distribution is the resulting indicator that reflects the effectiveness of the company for the entire period. Net income reflects how the company worked in the reporting period.
Accounting considers the profit before distribution as a total indicator, which is reflected in the account 84 of the organization’s reporting. It is not distributed, but reduced to a single result. How to distribute profits will be decided by shareholders at a meeting that occurs after the closing of the reporting period in spring or summer.
Profit calculation before distribution is made according to a certain scheme. To do this, take data from account 90 "Sales". It reflects the amount of profit from the sale of goods, the provision of services or work. This information is reflected on the loan. The debit 90 of the account shows the cost of production. Also, VAT is charged here and other expenses are reflected.
In the process of generating income that requires distribution, the total balance from the specified account is transferred to 99 account. It is called Profit and Loss. If profit is made, the accountant posts the funds as follows:
If the account balance 90 is negative, the posting looks like this:
The result of operations from operating and non-operating activities is reflected in account 91. It is called “Other income and expenses”. In this account reflect the following operations:
- sale or lease of assets that belong to the enterprise;
- markdown or revaluation of fixed assets;
- profit from operations with foreign currency;
- investment in the authorized capital of other organizations;
- donation or liquidation of property;
- income (expenses) from procedures with securities.
You can make the following postings to this account:
- Dt 91 Kt 99 - determines the profit for the reporting period.
- Dt 99 Ct 91 - a loss was received.
Formation of financial results
There are other sources of retained earnings that take into account the result of the company’s activity when forming. So, the write-off of amounts 90, 91 in accounting practice is called balance sheet reformation. However, for some companies, the procedure for generating retained earnings does not end there.
On account 99, among other things, the balance of other accounts is transferred. It can be:
- Account 76. It is called "Extraordinary expenses and income." This, for example, may be a loss of funds from natural disasters or compensation for loss through insurance compensation, etc.
- Score 10. It is called "Materials." It reflects the value received on the balance of inventory that cannot be used in the production process.
In the statement of retained earnings, the total amount is increased if errors are discovered in the financial statements. In this case, such actions lead to unreasonable overstatement of costs. Also, the amount increases if there are unclaimed dividends, if more than three years have passed from the moment of their accrual to shareholders.
If there are errors that overestimated the amount of profit, the amount of retained earnings for the year decreases.
This result is not always generated solely at the expense of funds in the relevant current accounts. For example, when discounting fixed assets, profit increases, but there is no addition of money. When conducting an economic analysis, this must be taken into account.
On the last day of the reporting period, the organization writes off the results of account 99 to account 84. The full amount of income before distribution is shown here. To do this, the chief accountant must make postings upon receipt of profit in the reporting period:
If a loss has been received, the transaction will be as follows:
Then 99 the account is reset, it does not conduct any operations until the end of the next reporting period. It is worth noting that account number 84 is active-passive. Before you add the amount of income to it, income tax is deducted from it.
The essence of revenue before distribution and uncovered loss
Having considered to which account retained earnings should be accrued, how this process is going, it is necessary to pay attention to the essence of the presented category. This is an absolute indicator that reflects the efficiency of the enterprise. In accounting, there are no significant differences between profit requiring distribution and uncovered loss. The difference is in the postings. The debit and credit of the accounts for profit or loss are different.
In most cases, a company that has been operating for more than a year covers excess costs with surplus revenue from previous years. Funds can also be deducted from the reserve fund, additional or authorized capital.
If profit is made, the organization has the right to independently decide for what purposes it should be directed. The decision is made at the meeting of shareholders. Depending on the current situation on the market, as well as within the company itself, a direction for financing is chosen. There are several directions for the distribution of net profit received in the reporting period.
Retained earnings are reflected in the liability form No. 1. In this case, there is an increase in capital due to retained earnings. These are the organization’s own funds that can be reinvested in production. In terms of profit before distribution, we can conclude about the effectiveness of the means used during production. If we analyze in detail the information that is used in calculating the presented indicator, we can conclude what factors influenced it in the reporting period.
If the organization received a loss, its amount is shown with a minus sign, taken in parentheses in the balance sheet. In this case, it is extremely important to determine why the company did not make a profit in this period. There are many factors that lead to a drop in income. They must be identified, and then developed a methodology to prevent a negative effect in the future.
Calculation technology
Equity and reserves can be filled at the expense of net profit. To calculate it correctly, apply simple technology. To do this, you need to determine the amount of net profit, income before distribution at the beginning of the year, as well as the amount of dividends. If the company is an AO, payments are made to the owners of the relevant securities. For the LLC, dividends are paid to the founders.
The relevant data are presented in the balance sheet in line 1370 and in the statement of financial performance in line 2400. If the company received a net profit, the calculation looks like this: NP = NPn.g. + PE - D. Where:
- NPn.g. - profit before distribution at the beginning of the year.
- PE - net profit.
- D - dividends paid to owners.
If no income was received in the current period, he will not be able to fill capital and reserves. In this case, the calculation is made according to the following formula: NP = NPn.g. - U - D. Where:
- Y is the amount of the company's net loss.
The loss may be greater than the accumulated net profit at the beginning of the year. In this case, a negative value is indicated in the balance sheet. It is taken in parentheses. This is an uncovered loss, which reduces the balance sheet currency.
Varieties of accounting
Retained earnings can be accounted for in various ways. There are two options:
- Cumulative.
- Weather.
Under the accumulative accounting system, the opening of separate sub-accounts for the profit of previous periods and the current year is not performed. The entire amount is reflected in the account number 84. It accumulates from the first year of operation of the organization. If a loss occurs, it is blocked by previously created savings.
Accumulative accounting system is most often found in small enterprises. The weather approach is more detailed. In this case, there are separate subaccounts for accumulating amounts for previous reporting periods. Second-order accounts can be of different formats. For example, there are accounts 84.1 and 84.3. The first of them is used to account for profit before distribution for the reporting year, and the second for past periods.
To obtain detailed information, data are taken from the explanatory note of the annual report (attached to the balance sheet by large and medium-sized organizations) or from the accounting entries 84. Reporting of past periods is also used for analysis. If errors from previous years are identified, they will be taken into account as a result of the current year.
Information in the current period
Retained earnings of the company are reflected for the current period in various subaccounts. For example, accounting may be conducted as follows:
- Subaccount 84.1 - Profit earned.
- Subaccount 84.2 - Profit before distribution.
- Subaccount 84.3 - Profit used.
If this year the company receives a net income, the accounting department reflects it using the following postings:
If the operation was carried out with the account 84.3, this means that the profit was used for different needs of the company.
When using different accounting methods using the last posting in the reporting period, the accounting department will debit funds from 99 accounts and transfer them to 84 accounts. From this amount, the tax must first be deducted, and after that it relates to the result. They make such postings:
- Dt 99 Kt 68 - tax calculation is carried out.
- Dt 84 Kt 75 - accrual of dividends (account 70 can be used - bonuses to employees).
Who is eligible to use?
Before considering where you can use retained earnings before distribution, you need to pay attention to who can direct them to these or other needs. Only the owners of the company have the right to decide what expenses to cover at its expense. These may be shareholders or participants. Therefore, the 84 accountant account is often called the owner account.
According to the current legislation, the decision on the distribution of profits is made at a general meeting of participants or shareholders. Accounting for the distribution of revenue will depend on what decisions the owners make by open vote. Further, accounting receives the relevant instructions recorded in the minutes of the meeting.
But owners sometimes make serious mistakes in the process of profit distribution. But the fate of the company depends on the correctness of this decision. It is the accountant and the analyst who can tell the shareholders how to do the right thing in this case.
There are several options where you can use retained earnings. The procedure for implementing this process is regulated by legislation in the field of regulation of LLC and JSC. There are several options for how to distribute the net profit of the organization.
Reserve fund
Considering options where you can use this kind of income, you first need to pay attention to it. The law provides that joint-stock companies are obliged to form a reserve fund from net profit. Moreover, its size should be at least 5% of the amount of the authorized capital.
In case of losses, the accumulated reserve funds will be able to cover it. Also, this fund is used to repurchase own shares, redeem bonds. If the organization is a limited liability company, they can create a reserve fund at will, on a voluntary basis. The charter of such a company should state the size of such a fund, the goals for which these funds can be spent, as well as the amount of annual deductions.
To create a reserve fund accountant reflects the following posting:
In the balance sheet this amount is reflected in line 1360 of the third section. This allows you to improve the capital structure. For the amount of the reserve fund, owners are prohibited from withdrawing funds from the organization. This increases the safety of the company, increases its stability and, as a result, investment attractiveness.
Dividends
Dividends from retained earnings are paid. This leads to a decrease in the assets of the organization. This is the amount of compensation that owners receive for providing their capital to the company. Such a procedure in accounting is reflected by the posting:
When the money is paid to the owners, the following transaction will be reflected:
Money can be previously withdrawn from the account. In this case, they are issued in cash from the cash register. And the wiring will be as follows:
Dividends can be paid not only with money, but also with property. But this practice can be recognized in court as unlawful. Therefore, the company must first sell the property, subtract VAT from the amount received, and then pay the owners. If goods or fixed assets are issued as dividends, the sale of which does not require the payment of this tax, VAT is not charged. This, for example, may be land.
Loss coverage
If the company received an uncovered loss, it must write it off in different ways. There are several possible ways:
- Due to the reserve fund.
- From the accumulated profit fund for previous years.
- Due to additional capital.
- Decrease in share capital.
- At the expense of the owners' own funds.
Be sure to establish the reasons why the company received a loss. Measures are being taken to prevent this from happening in the future.