Group 3 RETAINED EARNINGS Santosh Hegde – 54 Vivek Prajapati – 55
Jan 17, 2015
Group 3
RETAINED EARNINGS
Santosh Hegde – 54Vivek Prajapati – 55
Group 3
In accounting, retained earnings refers to the portion of net income, which is retained by the corporation rather than distributed to its owners as dividends.
Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit.
Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
RETAINED EARNINGS – DEFINITION
Group 3
RETAINED EARNINGS
Instead of distributing the entire profits to the shareholders, company retains some profits for the purpose of-
Accumulations of earnings
Investment in fixed assets
To meet working capital needs
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MERITS OF PLOUGING BACK OF PROFITS
TO THE COMPANY-
Economical
Efficiency and productivity
Confidence of shareholders
Enhances creditworthiness
Less financial risk
Repayments of debentures &
term loans
Reduce the reliance
Helps expansion and
diversification
Helps automation and
modernization
Used to meet working capital
needs
Follows a stable dividend policy
Freedom to take their own
decisions
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MERITS OF PLOUGING BACK OF PROFITS (Cont…)
TO THE SHAREHOLDERS-
Appreciation in share values
Bonus shares
Regular dividends
Security value
TO THE SOCIETY-
Increases capital formation
Helps speedy development
Benefits to the consumers
Social welfare of activities
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Retained earnings are reported in the shareholder’s equity
section of the balance sheet.
Companies with net accumulated losses may refer to
negative shareholder’s equity as a shareholder’s deficit.
A complete report of the retained earnings or retained losses
is presented in the statement of retained earnings or
Statement of Retained Losses.
RETAINED EARNINGS – SYNOPSIS
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FOR EXAMPLE
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The calculation is:
+ Beginning retained earnings
+ Net Income during the period
- Dividends paid
= Ending retained earnings
The retained earnings formula is also known as the retained earnings
equation
RETAINED EARNINGS – CALCULATION
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For e.g., ABC International has $500,000 of net profits in its current year, pays out $150,000 for dividends, and has a beginning retained earnings balance of $1,200,000. Its retained earnings calculation is:
+ 1,200,000 Beginning retained earnings+ 500,000 Net income- 150,000 Dividends= 1,550,000 Ending retained earnings
FOR EXAMPLE
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