Concepts Behind Retained Earnings Statement

The principle of Retained Earnings is to retain or reserve those parts of the earnings of the company to itself without giving it either as dividends for shares or declaring it as expenditure. This amount is either re-invested in the business or recorded under equity for shareholders in the balance sheet of the concern. The greater the movement of amount to the share holders' equity, the more is the Retained Earnings which is represented in the Statement. In general the income generated during a particular period of time is represented as the difference between the beginning and the end of the Retained Earnings. The representation of Retained Earnings can be done as a separate statement or it could be included in the Balance Sheet or in the Income Statement of the company. However, in concerns dealing with business turnover on an enormous scale, Retained Earnings Statement is entered separately in order to bring out the reinvestment amount into the business.

Retained Earnings Is Represented As Below

Let us consider that the income of the current fiscal year of a company B is $50,000 while the Retained Earnings originally possessed by the concern is $150,000 from the previous year. If the dividend paid to share holders is $20,000, then the Retained Earnings for the current fiscal year would be the total of last year's Retained Earnings added with the current year's income and subtracted from the dividend paid, which would come up to $180,000. This is the amount which is recorded in the Retained Earnings Statement of the concern B.

There are also several sub-divisions or elements in Retained Earnings which could be represented as such in the Retained Earnings Statement. Those could include the stock in the treasury of the business, paid-up capital invested into the business and acquisitions done by the concern.

Most of the business concerns do not tend to reinvest the Retained Earnings back into the business, but hold it in stock for future use in conditions of compensation for losses acquired in a business or to clear present debts, rather than provide dividends to share holders. Three factors in a concern would influence its Retained Earnings namely the duration of the company, which denotes the period right from the inception of the company to the present, with greater duration contributing to better Retained Earnings for the business, the second factor being the dividends paid to share holders, with higher dividends causing a decrease in the Retained Earnings as dividends are usually paid from the income of the concern, which ultimately goes into the category of Retained Earnings and finally, the profit sustained through the years, which influence the amount of money denoted for Retained Earnings.

The main purpose of Retained Earnings Statement is to attract potential investors in a concern and to boost the confidence of those investing in the business by recording the profits from the investments and by depicting the ways in which the Retained Earnings are being utilized by the business.

Difficulties Encountered In Retained Earnings Statement

In some companies, the Retained Earnings is underestimated to show reduced profit, so as to avoid providing dividends to share holders or by under stating the value of Retained Earnings, especially if the dividends are pending as arrears. This is not known to students while calculating Retained Earnings of a business concern in a practical situation. Also several factors contribute to increase in Retained Earnings, and the students are not aware of some of them. They include earnings from disposal of stock which is considered under income, adjustments in profit done in the previous fiscal year leading to enhanced profits, part of which have not been brought in the income statement. Students should involve themselves to obtain exhaustive knowledge on the Retained Earnings in order to calculate it accurately. Also they should possess information on the point of negative Retained Earnings which means that instead of showing profits, the company has incurred losses for the current fiscal year, and the previous Retained Earnings are not sufficient to tide over the expenditure to be met by the company.

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