Retained Earnings

JACOB MATHEW
• Retained earnings represent the component of the shareholders’ equity arising
from the retention of assets generated from the profit-directed activities of the
corporation.
• At the end of the accounting period, the Income Summary account of a
corporation is closed to the Retained Earnings account.
• The Retained Earnings account is credited with the corporation’s profit or
debited with the loss.
• Distributions to shareholders of cash, property or stocks from unrestricted
retained earnings on the basis of all issued and fully paid shares, and all
subscribed par value shares except treasury shares are called dividends.
• Dividend declarations reduce retained earnings.
• Other less common situations that cause increases and decreases in retained
earnings: debits resulting from reissuance of treasury stocks below cost and loss
on retirement of treasury stocks and debits or credits for prior period errors.
• Prior period errors are errors discovered in the current period that are of such
significance that the financial statements of one or more prior periods can no
longer be considered to have been reliable at the date of their issue. Credit
entries increase the retained earnings balance and debits decrease it.
• A debit balance in the Retained Earnings account resulting from accumulated
losses is called a deficit.