Retained Earnings in Accounting and What They Can Tell You

Recall the transactions for Printing Plus discussed in Analyzing and Recording Transactions. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Ask a question about your financial situation providing as much detail as possible. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

Adjusting Entries: Accruals

Here are the Accounts Receivable and Fees Earned ledgers AFTER the adjusting entry has been posted. When the bill is paid on 12/31, Taxes Payable is debited and Cash is credited for $6,000. The Taxes Payable balance becomes zero since the annual taxes have been paid. Here are the Taxes Payable and Taxes Expense ledgers AFTER the adjusting entry has been posted. Here are the Wages Payable and Wages Expense ledgers AFTER the adjusting entry has been posted.

Prepaid Insurance – Deferred Expense

Retained earnings are calculated by subtracting a company’s total dividends paid to shareholders from its net income. This gives you the amount of profits that have been reinvested back into the business. Your bookkeeper or accountant may also be able to create monthly retained earnings statements for you. These statements report changes to your retained earnings over the course of an accounting period. Remember, under accrual-basis accounting, companies will only record the insurance expense if and when the company uses it per month.

What is your current financial priority?

An expense is a cost of doing business, and it cost $100 in insurance this month to run the business. Here are the ledgers that relate to the purchase of supplies when the transaction above is posted. The word “expense” implies that the supplies will be used within the month.

• To naïve investors who think the appropriation established a fund of cash, this second entry will produce an apparent increase in RE and an apparent improved ability to pay a dividend.
• An adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period.
• Account for the board of directors’ decision to approve a dividend for the period by adjusting retained earnings in the balance sheet.
• After 12 full months, at the end of May in the year after the business license was initially purchased, all of the prepaid taxes will have expired.
• For example, you might have a building for which you paid $1,000,000 that currently has been depreciated to a book value of $800,000.

Additional paid-in capital is included in shareholder equity and can arise from issuing either preferred stock or common stock. The amount of additional paid-in capital is determined solely by the number of shares a company sells. Additional paid-in capital does not directly boost retained earnings but can lead to higher RE in the long term. Additional paid-in capital reflects the amount of equity capital that is generated by the sale of shares of stock on the primary market that exceeds its par value. Here are the ledgers that relate to the purchase of prepaid rent when the transaction above is posted.

• The same adjusting entry above will be made at the end of the month for 12 months to bring the Taxes Payable amount up by $500 each month.
• Over the same duration, its stock price rose by $84 ($112 – $28) per share.
• The balances in the Supplies and Supplies Expense accounts show as follows.
• At the period end, the company would record the following adjusting entry.
• The adjustment entry in this case is a debit to the retained earnings account and a credit to the capital reserve or risk reserve account.
• The word “expense” implies that the rent will expire, or be used up, within the month.

Although fixed assets cost a company money, they are not initially recorded as expenses. (Notice in the journal entry above that the debit account is “Equipment,” NOT “Equipment Expense”). Fixed assets are first recorded as assets that later are gradually “expensed off,” or claimed as a business expense, over time. The adjusting entry ensures that the amount of taxes expired appears as a business expense on the income statement, not as an asset on the balance sheet.

Working Capital: What It Is and How to Calculate It

Accrued revenues are revenues earned in a period but have yet to be recorded, and no money has been collected. Some examples include interest, and services completed but a bill has yet to be sent to the customer. When a company purchases supplies, it may not use all supplies immediately, but chances are the company has used some of the supplies by the end of the period. It is not worth it to record every time someone uses a pencil or piece of paper during the period, so at the end of the period, this account needs to be updated for the value of what has been used. Journal entries are recorded when an activity or event occurs that triggers the entry. Recall that an original source can be a formal document substantiating a transaction, such as an invoice, purchase order, cancelled check, or employee time sheet.

After one month, $1,000 of the prepaid amount has expired, and you have only 11 months of prepaid rent left. If you DON’T “catch up” and adjust for the amount you used, you will show on your balance sheet that you have $12,000 worth of prepaid rent at the end of the month when you actually have only $11,000 remaining. In addition, on your income statement you will show that you did not use ANY rent to run the business retained earnings adjusting entry during the month, when in fact you used $1,000 worth. The first journal entry is a general one; the journal entry that updates an account in this original transaction is an adjusting entry made before preparing financial statements. This is posted to the Unearned Revenue T-account on the debit side (left side). You will notice there is already a credit balance in this account from the January 9 customer payment.

You don’t have to compute depreciation for your books the same way you compute it for tax purposes, but to make your life simpler, you should. Generally, one-half of FICA is withheld from employees; the other half comes from your coffers as an expense of the business. The amounts are a little different in 2012 because of the payroll tax break.