Statement of retained earnings is one of important financial statement of company. It is also called profit and loss appropriation account. In this statement, we take the help of income statement or profit and loss account for calculating current year net profit and it is prepared for balance sheet for showing current year retained earning balance.
We do many adjustments before showing the closing balance of retained earnings which will transfer to balance sheet’s shareholder’s equity section in liability side. We deduct transfer of dividend and reserve from opening balance of retained earnings.
Following is its simple formula
Opening balance of retained earning+ Net Profit – (Dividend + Reserves) = Closing balance of Retained Earnings
Following is its format
Now we explain it in detail
1. Opening Balance of Retained Earnings
Every year, we do not give whole profit to our shareholders in the form of dividend because we need also money for growth of business. If we issue new shares, it will decrease the control level of past shareholders. So, we use it as substitute of our fresh capital. If we did not use in business, it will show balance in liability side of balance sheet. We can take from our opening balance sheet.
2. Current Year Net Profit
Every year, we make the profit and loss account which is the matching of our revenues and expenses. On this basis, we will calculate the net profit. We will add it in opening balance of retained earning. With this, our total retained earnings will increase.
3. Withdraw of Reserves
In past, we deduct the reserves from opening balance of retained earnings. Now, if we withdraw reserves, we again part of retained earning, so, we will add in opening balance of retained earnings.
4. Transfer to Dividend
Dividend is the amount which is given to shareholder because shareholders invest money in our company. So, they have right to get dividend. Same dividend will decrease our total profit which is in the form of retained earnings and current year net profit.
5. Transfer to Reserves
For securing future risks, we create reserves. So, these reserves will also decrease our total profit. So, we will deduct it from our total retained earnings.
6. Provision for Taxation
Except above, if we have transferred to provision for taxation, we will deduct it from gross retained earning. If previous provision of taxation is not required, we will add in gross earning. If there is refund of income tax, we will also add in gross retained earning.
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