Retained Earnings Journal Entry Example

Check out this article “Encourage General Ledger Efficiency” from the Journal of Accountancy that discusses some strategies to improve general ledger efficiency. Some benefits of reinvesting in retained earnings include increased growth potential and improved profitability. Reinvesting profits back into the retained earnings adjusting entry business can help it expand and become more successful over time. When a prior period adjustment is used, it appears as a correction of the beginning balance of RE and is fully described. With the relative infrequency of material errors, the use of this type of adjustment has been virtually eliminated.

3 Record and Post the Common Types of Adjusting Entries

This recognition may not occur until the end of a period or future periods. When deferred expenses and revenues have yet to be recognized, their information is stored on the balance sheet. As soon as the expense is incurred and the revenue is earned, the information is transferred from the balance sheet to the income statement. Two main types of deferrals are prepaid expenses and unearned revenues. Retained Earnings are reported on the balance sheet under the shareholder’s equity section at the end of each accounting period. To calculate RE, the beginning RE balance is added to the net income or reduced by a net loss and then dividend payouts are subtracted.

• Retained earnings (RE) are calculated by taking the beginning balance of RE and adding net income (or loss) and then subtracting out any dividends paid.
• For our initial journal entry, let’s say that on October 4th, Apple paid $600 for a one-year insurance policy for theft prevention.
• You credit an appropriate payable, or liability account, to indicate on your balance sheet that you owe this amount.
• At the end of a period, the company will review the account to see if any of the unearned revenue has been earned.
• GAAP specifically prohibits this practice and requires that any appropriations of RE appear as part of stockholders’ equity.
• As an important concept in accounting, the word “retained” captures the fact that because those earnings were not paid out to shareholders as dividends, they were instead retained by the company.
• The adjusting entry for supplies updates the Supplies and Supplies Expense balances to reflect what you really have at the end of the month.

What Is the Purpose of Adjusting Journal Entries?

Book Value is what a fixed asset is currently worth, calculated by subtracting an asset’s Accumulated Depreciation balance from its cost. Here are the Equipment, Accumulated Depreciation, and Depreciation Expense account ledgers AFTER the adjusting entry above has been posted. There are two changes that will be made so that the journal entry is CORRECT for depreciation. Here are the Prepaid Taxes and Taxes Expense ledgers AFTER the adjusting entry has been posted. Here are the Prepaid Rent and Rent Expense ledgers AFTER the adjusting entry has been posted.

• According to the provisions in the loan agreement, retained earnings available for dividends are limited to $20,000.
• This is posted to the Accumulated Depreciation–Equipment T-account on the credit side (right side).
• The primary distinction between cash and accrual accounting is in the timing of when expenses and revenues are recognized.
• The same is true about just about any asset you can name, except, perhaps, cash itself.
• The two specific types of adjustments are accrued revenues and accrued expenses.

Balance Sheet (BS)

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. However, today it could sell for more than, less than, or the same as its book value. The same is true about just about any asset you can name, except, perhaps, cash itself.

Which of these is most important for your financial advisor to have?

Since there was no bill to trigger a transaction, an adjustment is required to recognize revenue earned at the end of the period. Depreciation Expense increases (debit) and Accumulated Depreciation, Equipment, increases (credit). If the company wanted to compute the book value, it would take the original cost of the equipment and subtract accumulated depreciation. This is posted to the Interest Receivable T-account on the debit side (left side). This is posted to the Interest Revenue T-account on the credit side (right side).

How can I track my company’s retained earnings?

This trigger does not occur when using supplies from the supply closet. Similarly, for unearned revenue, when the company receives an advance payment from the customer for services yet provided, the cash received will trigger a journal entry. When the company provides the printing services for the customer, the customer will not send the company a reminder that revenue has now been earned.

5.1 Accrued Expenses

Prepaid Rent – Deferred Expense