Retained Earnings and Accumulated Deficit
When you look at the Profit and Loss Statement, the final number will be a Net Income or Net Loss, depending on how much money an organization has made less all the expenses, etc. Retained earnings is the net income portion retained in the business after declaring the dividends, so it remains at the disposal of the organization. This term can be found in the corporate form of business.Retained loss is an accounting term that reflects the amount of losses of the organization that must be restored, compensated in the future. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. For this reason, retained loss is also known as accumulated deficit.The earnings that have been retained can be divided into two parts: unappropriated and appropriated. Unappropriated or unrestricted retained earnings is the portion of the earnings retained that is available for future distribution as dividends. Appropriated retained earnings, on the other hand, is set for a particular purpose. In other words, this money are restricted and cannot be distributed to shareholders. These restrictions may be legal, contractual or voluntary.
Accounting for Retained Earnings
Financial reports are a place where one would expect to find how much retained earnings an organization has. The Balance Sheet is a report you need to check. At the bottom of this statement, one will see Retained earnings listed as part of a company’s Shareholder’s Equity. One would search for Retained Earnings on the Balance Sheet of the organization because they actually represent the money owned by the business owners/shareholders that they decided to reinvest into the business.Unlike other accounts included in this financial report, Retained Earnings on the Balance Sheet reflect both retained earnings (or loss) for the reporting year and all the previous years. An exception to this would be a company that has just started its business operations.
Analyzing Retained Earnings on the Balance Sheet
Retained income figure is a significant component of a healthy business. When investing in a business, this is something investors are looking for in a business. What can Retained Earnings on the Balance Sheet tell the investors and other interested parties? Retained earnings often make up a large portion of the Stockholder’s equity in companies that have been around for a long time and have been profitable for a long period of time. Not everyone knows that Retained Earnings on the Balance Sheet is not a big pile of cash a company is holding in its bank account. These earnings have to be used either for investing into the company’s future by purchasing assets or expanding the company by research and development, and such or they can be used to pay off debt.
Investors should analyze what the company is doing with its retained earnings because they want to see smart use of their money (because that is their money if they own share/stock in the company). One of the signs that company management is not doing a great job using the investors’ money is a decrease in the Retained Earnings or even a Retained Loss. An exception would be a payment of large amounts of dividends during the same periods.An increase in Retained Earnings on the Balance Sheet has two potential explanations. A company has made the same amount of net earnings as it did last year, but it decided to pay less in dividends and keep more in the form of retained earnings. Alternatively, a company actually invested their retained earnings very well and was able to produce greater earnings per share. If they continue to pay the same dividend level the Retained Earnings account will increase.