Retained earnings - part of the net income remaining after the payment of dividends and intended for reinvestment in the development of production or for the payment of company debts. This part of the profit is invested in the fixed assets of the enterprise. Retained earnings are often stored in the form of various securities or in the form of cash balances and balances on settlement accounts. It is used to finance capital investments, to repay loans and to increase the volume of liquid assets. Compared with the usual mobilization of new capital by the method of issuing shares and borrowing, retaining a share of profit is a simpler method of financing the needs of the enterprise. Retained earnings are invested in the purchase of new enterprises or companies, the acquisition of assets and the expansion of commodity credit. It is a source of financing investment in the economy.
The amount remaining after deducting from the profit received by the enterprise all taxes and mandatory payments is called “net profit”. The owners of the company have the full right to dispose of it. It is the main source of payment of income to these owners, and its presence favors the attraction of additional investment in the enterprise. Retained earnings of past years remaining at his disposal after paying income goes to increase equity, which is invested in the development of production.
Retained earnings in the balance sheet are formed throughout the year and are reflected in the December turnover of the reporting year. The following record is made:
Dt 99 Kt 84 "Retained earnings." This posting means write-off of profit.
The shareholders or the administration of the organization at the general meeting determine the procedure for the distribution of profits. In this case, the provisions provided for in the constituent documents of the company are used. His decision is recorded in a special protocol. It is on the basis of this document that accounting records all the necessary records. Before making entries, the accountant must verify the conformity of the decision in the protocol with the profit distribution procedure set forth in the Charter of the organization. Such profits are directed to:
- repayment of losses;
- registered capital;
- dividend payment;
- enterprise development;
- Reserve capital;
- creation of special funds (social sphere and consumption).
There is retained earnings before taking into account the decision on the distribution of profits in the form of dividend payments and taking into account such a decision. The first is reflected in the reports as net profit, and the second is displayed in the balance sheet.
A part of the profit that was spent during the reporting period is written off when it was used, and only that part of it that is intended for disposal by the owners is allocated for the reformation.
During the reformation of profit, the credit balance (balance) is displayed on account 99 “Profit and loss”. It is credited to account 84, called “Retained earnings (uncovered loss)”. This posting is the last of the year.
To generate more detailed information on the ways of profit distribution to 84 accounts, it is recommended to open several sub-accounts on which this information will be detailed. The systematic display of the use of profit facilitates communication between participants in the organization while deciding on the amount of income that is planned to be paid in the form of dividends.
Undoubtedly, retained earnings require careful accounting, therefore, all of its changes are reflected in the financial report, which are prepared in this way:
- First of all, they show the input amount of retained earnings;
- further to the amount of profit add all the amounts that were transferred from the funds;
- from the figures received earlier, the amounts transferred to the funds and dividends intended for payments to participants are deducted;
- as a result of all calculations, the desired profit is obtained at the end of the period.