The most important economic indicator showing the effective operation of a company is retained earnings. The positive dynamics of this indicator, along with other economic indicators may indicate positive performance of the company. Let's look in this article at what retained earnings are, where is it reflected on the balance sheet, and in what account is it recorded?

The concept of retained earnings

Retained earnings (loss) consists of such indicators as NP (loss):

• Current year;
• Previous years.

Only the owners of the company can dispose of this profit; this happens at the general meeting of shareholders, in accordance with the provisions provided in the constituent documents. Actions to dispose of profit are recorded in the protocol general meeting and this serves as the basis for the accountant to create entries for the use of profits.

Retained earnings account

The company's NP is formed after carrying out the procedure for reforming the balance sheet in the 1C Accounting program. This happens with the last accounting entry, in which account 99 “Profits and losses” is closed to account 84 “Retained earnings (uncovered loss)”. And after this, the profit is distributed (used) on account 84.

Retained earnings in reporting

NP is taken into account in the liability balance sheet and is reflected in line 1370. It is shown on an accrual basis from the beginning of the company’s activities. Retained profit is net profit - this is the amount remaining after paying all taxes and after distributing shares between the owners, that is, the final result in account 84. If the company is closed (liquidated), then the amount of accumulated profit will be distributed among the owners (shareholders) of the company, therefore they are primarily interested in a positive result this indicator.

But this line of the balance sheet can reflect not only profit, but also an uncovered loss of the company, this is when expenses exceed income. It is reflected in the balance sheet in parentheses. This can add up (accumulate):

• As a result financial year;
• From previous years.

Example: Leader LLC had the following indicators at the end of the financial year:

• Revenue from the sale of goods (services) – 50 million rubles.

including:

— sales of pasta – 30 million rubles.

— sales of agricultural products – 10 million rubles.

- implementation motor transport services– 10 million rubles;

• Non-operating income – 10 million rubles;
• The cost of goods (services) and distribution costs associated with the sale of goods and own services – 40 million rubles;
• Other expenses – 25 million rubles.

The uncovered loss amounted to 5 million rubles at the end of the financial year. (50 + 10 – 40 – 25).

If the company’s activities began only in the current period, then the data in the accounting. forms: page “Retained earnings (loss)” of the Balance Sheet and page “Net profit (loss)” of the Statement financial results will match.

Retained earnings for external users

NP is important only to the shareholders (owners) of the company, but also to external users (investors, bank employees, regulatory authorities).

Investors are interested in where this indicator is spent.

It can be spent:

• To pay dividends to shareholders;
• To pay off losses from previous periods of the company’s activities;
• For infusion investment flows in the development of the company (for example: acquisition of fixed assets, equipment, etc.);
• To increase authorized capital;
• To create reserve fund;
• For other purposes established legislative acts RF.

If a loss is received, it can be repaid from the following sources:

• Due to own funds shareholders;
• Due to the profit received from previous periods of the company’s activities;
• Through the use (reduction) of the authorized capital;
• By using (reducing) the reserve fund.

It is important for investors that more profits are spent not on paying dividends, but on investment activity companies. But it is also important for them that the profit received before distribution increases every year, and not decreases.

Accounting entries for the use of profit (loss absorption)

The use of the organization's retained earnings is reflected as follows: accounting entries on accounting accounts:

The repayment of the company's loss is reflected as follows: accounting records on accounts:

One of characteristic features market economy is the competition of most enterprises among themselves.

When summing up the results of the work, the most important financial indicator is profit. Its positive dynamics, along with other economic indicators, indicates the efficiency of the business entity.

On further development influences the choice of ways to distribute profits, which remain in the hands of the owners of the enterprise.

Management decisions in this matter will determine the strategy and goals for at least the next year. Annual bonuses to employees, dividends, the size of the reserve fund - all this will depend on how profits are distributed after payment of all mandatory payments.

Retained (another name is accumulated) profit is the part of profit remaining at the disposal of the enterprise after paying taxes, dividends, fines and other obligatory payments.

This concept closely intersects with. If the company has no deferred tax obligations and dividends were not accrued during the year, then these indicators in the annual reports coincide. However, retained earnings represent the resulting indicator for the reporting year and for the entire period of the company’s existence, and net profit - only for reporting period.

This term is interpreted differently in accounting and economic understanding. For an accountant, this is the final result of work, reflected in the reporting on account 84. But it has not yet actually been distributed, since the decision on where to send retained earnings is made by the owners (shareholders) in the period from March 1 to June 30 of the next year. Therefore in economic sense consider the profit for the past year after this date, that is, when the accountant makes all deductions according to the decision of the owners of the enterprise.

How is it formed and what does it include?

A positive or negative result from the sale of products or the provision of services is reflected in the active-passive account 90 “Sales”. The debit of the account shows the full and other expenses. The loan reflects revenue. The final balance is transferred to account 99 “Profits and losses”.

Postings are carried out:

• Dt90Kt99 – profit made;
• Dt99Kt90 – loss received.

The operations of the enterprise, which are classified as operating and non-operating, are shown on account 91 “Other income and expenses”.

These include:

1. Sale and rental of assets owned by the company;
2. Depreciation and revaluation of non-current assets;
3. Transactions with foreign currency;
4. Investments in business shares of other companies;
5. Liquidation and donation of property;
6. Income and expenses from transactions with securities.

Postings are as follows:

• Dt91Kt99 – profit made;
• Dt99Kt91 – loss received.

This procedure for writing off the totals for accounts 90 and 91 is called balance sheet reformation. Many economists understand this term as the direct distribution of accumulated profit from account 84.

Similarly, the balance from accounts 76 is transferred to account 99 " Extraordinary Income and expenses" (for example, insurance compensation or losses from natural Disasters) and 10 “Materials” (the cost of accepted inventory items that are unsuitable for production).

Retained earnings increase when errors are detected in financial statements which led to inflated costs. And also in case of unclaimed dividends by shareholders, if more than three years have passed since they were accrued. Accordingly, errors that create an overstatement of income will reduce the accumulated profit.

They are not always cash in the form of cash or in a current account (depreciation of fixed assets increases profit, but does not add money). This must be taken into account when conducting economic analysis.

In the last days of the reporting year Chief Accountant conducts write-off of the final balance(profit or loss) from account 99 to account 84 “Retained earnings”.

Postings are made:

• Dt99Kt84 – upon receipt of profit;
• Dt84Kt99 – upon receipt of a loss.

After this, account 99 is reset to zero and no transactions are carried out on it until the beginning of the next year. Count 84 is active-passive. Before entering the total amount of accumulated profit into the financial statements, the amount of income tax is subtracted from it (later it can be adjusted).

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Retained earnings and uncovered losses: commonalities and differences

These terms are in absolute terms efficiency of the enterprise. There are no significant differences in accounting, except for the difference in debit and credit entries. As a rule (although not always), the loss is covered by the profit balances of previous years, the reserve fund, the authorized or additional capital. Profit in reporting year by decision of the owners, they are distributed in a number of directions.

Retained earnings, which is part of the liability side of the balance sheet, actually increases the equity capital of the business entity. This states the effectiveness of invested assets in production. A detailed analysis will show which factors were responsible for achieving profit.

In the Balance Sheet (Form No. 1), the amount of loss is reflected with a “-” sign and is taken in parentheses. If it is present, it is necessary to carefully analyze the reasons. This can be either a negative sales result and a drop in the competitiveness of products, or a temporary phenomenon with large investments in production that slowly pay off.

Calculation procedure and formula

For JSC ( joint stock companies) these are dividends to shareholders, and for LLCs (Companies with limited liability) – payments to founders.

This data comes from lines 1370 and 2400. Interim payments during the year from future profits must be reflected in the order for the enterprise.

If in this year profit made , That calculation formula will be the following:

NPoch.year = NPat the beginning of the year + Pnet. – Double, where
NPna beg. year - retained earnings at the beginning of the year,
Pchist. – net profit,
Double – dividends paid to shareholders.

If this year loss received , That formula will change a little:

NPoch.year = NPat the beginning of the year – Dec. – Double, where
Ub. – loss for the current year.

The value of NPotch.year may be negative if the loss for the current year is greater than the accumulated profit at the beginning of the year. Then this indicator will be called uncovered loss.

For enterprises of different forms of ownership, the formula may change, but the calculation principle is the same.

Display in financial statements

Retained earnings (or uncovered loss) are included in the capital and reserves of the enterprise and are displayed in the liability side of the balance sheet on line 1370. In per annum accounting reports the total amount is shown taking into account preliminary decisions based on the results of activities. That is, minus losses from previous years (if any), accrued dividends, contributions to the reserve fund and other expense items. These figures may change pending final approval from the company's owners.

Past reporting years

Possible two accounting methods accumulated profit:

• cumulative,
• weather

With the first method, the division of profit for the reporting year and previous years by opening separate sub-accounts to account 84 is not carried out. It accumulates on a cumulative basis from the beginning of the operation of the enterprise. If a loss occurs, it is automatically covered by the existing profit of previous years. This is typical for small businesses.

The annual accounting method is distinguished by the presence of separate subaccounts for synthetic accounting accumulated profits over different periods.

Options for second-order accounts can be different, for example:

• account 84.1 – Retained earnings of the reporting year;
• account 84.3 – Retained earnings from previous years.

In both cases, the amount received in previous years is included in the calculation of the results for the reporting year.

For getting detailed information necessary data from the following sources:

• explanatory note - can be attached to the balance sheet (except for small enterprises);
• accounting entries for account 84;
• reporting of previous years.

If errors are detected in the calculation of profit or loss for previous years, they will be taken into account in the financial result for the reporting year.

This year

To reflect profit for the current year in accounting, the company can open sub-accounts to count 84, for example:

• 84.1 – Profit received;
• 84.2 – Retained earnings;
• 84.3 – Profit used.

The positive result obtained for the current year will be reflected by posting Dt84.1Kt84.2. Postings involving account 84.3 mean using profits for various purposes.

For any accounting options, the last entry for the reporting year in the General Ledger will be a write-off from account 99 to account 84. Interim dividends or payments (if any) have already been pre-calculated from this amount of accumulated profit.

The following transactions are made:

• Dt99Kt68 – tax calculation,
• Dt84Kt75 (or Kt70) - calculation of dividends (account 70 - bonuses for employees).

Uncovered loss

To reflect the current year's loss there may be subaccount 84.4 opened – Received loss. If it is not covered by the profits of past years, the owners of the enterprise decide to pay it off from other sources or leave it on the balance sheet. In this case, it is considered uncovered and the negative value is carried to line 1370.

With the annual accounting method, information about uncovered losses for the current year and previous years posted to subaccounts to account 84:

• 84.2 – Uncovered loss of the current year;
• 84.4 – Uncovered loss from previous years.

Check procedure

Information on movements of retained earnings (uncovered losses) throughout the year is reflected in the Statement of Changes in Capital (Form No. 3).

Some small businesses and non-profit organizations in annual reporting this report may not be included. It contains data for 3 years, including the reporting year.

What is negative retained earnings?

This is synonymous with the “uncovered loss” result. Some economists use this term when the loss did not arise due to negative performance results.

If errors of large amounts are discovered in cost calculations, losses can occur even for very profitable companies.

Directions for spending

After the balance sheet reformation, the chief accountant distributes the accumulated profit according to the decision of the owners of the enterprise. He has no right to do this on his own.

Compared to other articles, it can be disposed of more freely, but within the framework of the company’s charter and the law Typical wiring for various areas of spending profits will be as follows:

1. Dt84Kt84 – covering losses from past years. Also, this posting in the context of individual subaccounts of account 84 (for example, 84.2/84.3) can display investment in production through the acquisition of non-current assets;
2. Dt84Kt82 – contributions to the reserve fund (creation or replenishment);
3. Dt84Kt75 (80) – increase in the authorized capital (for an LLC on a loan account 75, and for a JSC – account 80);
4. Dt84Kt83 – increase in additional capital.

It is not allowed to distribute profits if there is a debt on investment in the authorized capital (debit to account 75) of at least one of the owners. The same rule applies if the value net assets the enterprise is less (or will become less after the planned distribution of profits) of its authorized capital and reserve fund, as well as in the case. The same restrictions apply to the payment of dividends on shares.

For an LLC, the creation of a reserve fund is not necessary, but for a JSC its size must be specified in the charter (minimum 5% of the authorized capital). Enterprises of the LLC form can create various funds for spending profits (development, bonuses for employees, social sphere, charity). To reflect them in accounting, it is possible to open any subaccounts to the necessary accounts.

For JSCs, the law provides for the possibility of creating a fund to corporatize the company's employees. Funds from it are spent only on purchases valuable papers from shareholders. In the future, employees of the company can buy out free shares.

Direction of retained earnings into production(both in assets and liabilities), in essence, is open self-financing. This is also called reinvestment or hoarding.

The peculiarity of investing profits in the development of production is that the acquisition of property does not reduce the liabilities of the balance sheet. At the same time, the asset increases. In fact, the profit will be spent, but the amount equity it won't reduce it. The amounts of funds spent will be reflected in the subaccount of account 84. When the amount of accumulated profit ends (the balance of account 84 becomes a debit), then it will become clear that further investments in production are made with the help of working capital.

Sources of loss coverage

The resulting loss shows a decrease in the amount of equity capital in the liabilities side of the balance sheet. Since the other articles of section 3 remained unchanged, loss can be written off in various ways.

Postings by sources of loss coverage:

• Dt82Kt84 – coverage from the reserve fund;
• Dt84Kt84 – coverage from the accumulated profit of previous years (posting in the context of individual subaccounts);
• Dt83Kt84 – repayment at the expense of additional capital;
• Dt80Kt84 – reduction of the authorized capital (it is equal to the amount of net assets) by the amount of the loss;
• Dt75Kt84 – repayment of losses at the expense of the owners.

All participants are interested in obtaining the enterprise’s profit and increasing it economic relations. It is the main source of net income for society, increasing the standard of living of the population.

What retained earnings are is described in the following video lesson:

Retained earnings represent the portion of a company's income that is not paid out to shareholders as dividends. This money is usually reinvested in the development of the company or used by it to pay off debts. Typically, retained earnings for a given accounting period are determined by subtracting dividends paid to shareholders from the company's net income. Accountants calculate retained earnings (and it is an important part of their job), but if you know the basic principles, you can do it yourself!

Steps

What is retained earnings

Find out where the company's retained earnings are recorded. Actually, this is the account that appears on the company’s balance sheet under the heading “Shareholder’s share in the company’s funds.” The funds stored in this account are the total profit of the company since its formation, which was not distributed among shareholders in the form of dividends. If this account goes negative, this situation is called an “accumulated deficit.”

• Knowing the retained earnings accumulated by an enterprise since its registration allows us to determine the balance of retained earnings after the next reporting period. For example, if your company's cumulative retained earnings are 12 million rubles, and during the current reporting period you deposit 6 million rubles into this account, then the new value of accumulated retained earnings will be 18 million rubles. In the next period, if retained earnings amount to 15 million rubles, this account it will turn out to be 33 million rubles. In other words, from the moment the company was created, you were able to do enough so that after paying wages, operating expenses, dividends to shareholders, another 33 million rubles remained “saved” for the company.

1. Try to understand the relationship between a company's retained earnings and the policies of its investors. On the one hand, investors in a profitable company expect a good return on their investment. On the other hand, they are interested in the development of the company, because in this case it will generate more profit, which means that their dividends will increase. For a company to grow and develop, it must invest its retained earnings in itself, improving its efficiency and/or expanding its business. If successful, such reinvestment in the long term will lead to an increase in the profitability of the company and the price of its shares, that is, investors will earn more money than if they had initially demanded larger dividends.

   It is necessary to know what factors influence the amount of retained earnings. Retained earnings may vary from one accounting period to the next, but this is not always the result of a change in a company's earnings. The following are factors that may affect the retained earnings balance:

   • Change net profit
   • Change of size Money, paid as dividends to investors
   • Change in cost of goods sold
   • Change in administrative expenses
   • Tax changes
   • Changing the company's business strategy

   Calculation of a company's retained earnings

   1. Collect the necessary data from financial statements companies. Companies are required to officially document their financial history. Typically, the easiest way to calculate current retained earnings is not by hand, but by using these official data on retained earnings accumulated to date, net income, and dividends paid. A company's capital and its retained earnings prior to the period of last entry should be shown on the current balance sheet, while net income is shown on the current income statement.

      • If you can obtain all this information, all you have to do is calculate retained earnings using the formula: “Net income – dividends paid = retained earnings.”
        • To find a company's cumulative retained earnings, add the current period's retained earnings to the amount in the account at the end of the last reporting period.
      • For example: let’s say that at the end of 2011, your company had 150 million rubles of total retained earnings in its account. In 2012, the company earned 15 million rubles in net profit and paid 5.5 million rubles in dividends. In this case:
        • 15 – 5.5 = 9.5 – retained earnings for this reporting period
        • 150 + 9.5 = 159.5 – total retained earnings

   2. If you do not have access to net income information, you can calculate retained earnings manually, although the process is more labor-intensive. Start by looking up the company's gross profit margin. Gross profit is shown on a multi-step income statement. It is determined by subtracting the cost of goods sold by the company from the income received from these sales.

      • Suppose that the company earned 1,500,000 rubles on sales during one quarter, but it had to spend 900,000 rubles on the purchase of goods necessary to generate 1,500,000 rubles. Gross profit for this quarter was 1,500,000 – 900,000 = 600,000.

   3. Calculate operating income. This is a company's income after covering all sales expenses and operating (running) expenses such as salaries. To calculate this figure, subtract all operating expenses (other than cost of goods sold) from gross profit.

      • Let's say that, having a gross profit of 600,000 rubles, the company spent 150,000 rubles on administrative expenses and wages employees. The company's operating income for this quarter is 600,000 – 150,000 = 450,000 rubles.

   4. Calculate net income before taxes. To do this, subtract interest costs, depreciation and amortization. Depreciation and amortization, which is the decline in the value of assets (tangible and intangible) over their useful life, is reported as an expense on the income statement.

Retained earnings (RE) – common accounting concept problem that many businesses face. This term stands for funds received through economic activity the company and those available to it after payment of tax deductions, dividends, fines, etc. Simply put, all mandatory payments.

An alternative name for retained earnings is retained surplus. In some cases, the concept of “profit retention rate” is used.

The main difference between retained earnings and net earnings is that it is always calculated not only for a specific period, but also for total term existence of the enterprise. Whereas net profit is determined only for the reporting period. But at the end of the year, which is logical, both indicators may be the same.

Retained earnings in the balance sheet relate to the passive part of funds. By default, it is believed that it should be distributed among the owners and used to optimize the company’s business model. Until this point, such profit can only be called the company’s debt to its owners. Refers to long-term sources financing, therefore the goal financial strategy the company must have its mandatory accumulation.

What to do with retained earnings

There are several main ways to refer an NP. Among them:

• payment of dividends to owners/shareholders;
• compensation for earlier losses;
• accumulation of reserve fund funds;
• other goals agreed upon by managers.

IMPORTANT! Regarding the last point, it is worth making a small clarification. Under the leadership of in this case not nominal officials, and business owners. As a rule, they resolve such issues during the final annual meeting, at which the corresponding minutes are drawn up.

What determines the size of retained earnings?

The indicator may differ in different reporting periods. It is influenced by such things as:

• the amount of dividends paid to the owners of the company;
• change in net profit;
• increase or decrease in the value of commodity assets;
• changes in overhead costs;
• revision of tax rates;
• change in the company's business strategy.

Retained earnings. Check

All NP for the past years is summarized in accounting account 84, the balance credit balance is placed in line 1370 of the balance sheet. The same line contains the amount of uncovered loss (if any), which is indicated in parentheses. Uncovered loss means the difference between the company's expenses and income during the year, according to which the first point exceeds the second.

The account contains information about the denomination and changes in the amount for the reporting year. At the end of the year, the amount is credited to account 84, while the loss is written off as a debit. The main task of this account is to store information about the purposes for which the funds were used.

An uncovered loss is sometimes called a deficit profit. The loss can be fully or partially compensated using reserve capital funds. In the case of compensation, data on the initial loss is not filled in (in case of partial compensation, only the remaining amount of the loss is indicated in parentheses).

IMPORTANT! At the request of the accounting department, additional lines – 1371 and 1372 – can be entered in the balance sheet to differentiate the figures for the reporting and previous years.

Calculation of retained earnings. Detailed formula

So, we found out that retained earnings are the amount of funds remaining at the disposal of the company’s owners after all taxes and other mandatory deductions. This indicator can be calculated using the formula:

HPk = HPn + ChP – D

• PE – net profit minus income tax;

Note: The standard reporting period is one year.

If during the current period the company received a net loss instead of profit, the formula takes on a slightly different form:

NPk = NPn – CHU – D

• HPc – surplus of funds at the end of the reporting period;
• HPn – the same indicator at the beginning of the period;
• NL – net loss;
• D – dividends distributed for the reporting period, based on the RR of the previous periods.

The remaining indicators are similar to the previous formula.

Keep your balance. Rational allocation of NP funds

It is believed that scaling a business should be priority goal when determining where retained earnings will go. Proper reinvestment can increase the overall profitability of a business and the stock market value of its shares. Which, in turn, will be a major advantage for investors. Banal payment of dividends is good only in the short term, while progressive development creates the potential for stable long-term earnings. If the company does not grow, investors will not see this potential and will want to increase dividends now, which is not desirable from a financial point of view for the company itself.

On the other hand, even taking into account the logic of the above, discussions often arise between the directorate and the management department of the enterprise regarding where to direct retained earnings.

If management is opposed to allocating funds to pay dividends and wants to use them exclusively for the implementation of new projects, shareholders may decide to sell shares.

As a result, the company's stock quotes will decline, as will its market capitalization.

Therefore, it is important for financial management to adhere to the so-called golden mean, providing investors with the profitability they expect, and at the same time directing funds to the development of the company.

Investments from the amount of retained earnings are often directed to the purchase of new equipment, marketing research, technology improvement and other items on which the further competitiveness and financial success of the business largely depends.

retained earnings(or a loss that was not covered) at the end of the reporting period is displayed in line 1370 of the balance sheet. It records the result obtained cumulatively over several years.

Is it true that retained earnings are net profits?

Retained earnings are truly net profits that (as the name suggests) were not distributed (divided) among the participants/shareholders of the company. Net profit is considered to be that part of income from sales and non-sales operations that remains after paying taxes.

The decision on how to distribute this income rests solely with the owners. Traditionally, the issue of retained earnings is put on the agenda of the annual meeting of the company's owners. Decision formalized by minutes, which are drawn up based on the results of the general meeting of participants/shareholders.

The main ways of spending retained earnings are considered to be in the following directions:

• to pay dividends to participants/shareholders;
• repayment of past losses;
• replenishment (creation) of reserve capital;
• other goals formulated by the owners.

Is retained earnings an asset or a liability?

Retained earnings on the balance sheet are, of course, a liability. The value of this indicator indicates the company’s actual debt to its owners, since ideally this profit should be distributed among the participants and invested in the further development of the business.

In fact, the company cannot dispose of retained earnings without the owners making a decision. The loss reflected in line 1370 is also on the passive side of the balance sheet, only this is a negative value, so the number is placed in parentheses.

Our article will help you better understand balance analysis "How to Read a Balance Sheet (Practical Example)?" .

Retained earnings and uncovered losses - what are they?

As mentioned above, retained earnings are the final income received by the company from its business activities, remaining after the transfer of income taxes and not yet divided (not directed to other purposes) by its owners.

Example 1

Voskhod LLC in 2018 made a profit of 800,000 rubles and paid income tax in the amount of 160,000 rubles. In line 1370 in the balance sheet liability at the end of 2018, Voskhod LLC should reflect 640,000 rubles. This is retained earnings.

The value in line 1370 of the balance sheet may be equal to that indicated in line 2400 of the financial results report if the company had no profits not distributed by the owners at the beginning of the year and no interim dividends were paid during the year.

Our article will help you read balance sheets correctly “Deciphering the lines of the balance sheet (1230, etc.)” .

As for the uncovered loss, this is the excess of the company's expenses over income at the end of the year.

Example 2

In 2018, Parus-Trade LLC received revenue from the provision of services and other non-operating income. Their total amount amounted to 400,000 rubles.

The costs associated with conducting the main activity (transportation) are equal to 380,000 rubles. Other company expenses (not taken into account for tax purposes) amounted to another 58,000 rubles. Profit tax was assessed in the amount of RUB 4,000. Parus-Trade LLC has no reserve capital.

This means that at the end of 2018, after the balance sheet reformation, an entry of 42,000 rubles will appear in line 1370 in parentheses. (400,000 - 380,000 - 4,000 - 58,000).

An uncovered loss occurs when the company receives an actual loss and there are no financing reserves. The value entered in the liability side of the balance sheet in parentheses will reduce the total for section 3 of the balance sheet.

Among the main reasons for receiving an uncovered loss are:

• obtaining an actual negative financial result from the company’s activities due to the excess of costs over income;
• changes in accounting policies that had an impact on the financial condition of the company (this is directly stated in paragraph 16 of PBU 1/2008, approved by order of the Ministry of Finance of Russia dated October 6, 2008 No. 106n);
• errors found in the current year, made in previous years, which affected the financial result (subclause 1, clause 9 of PBU 22/2010, approved by order of the Ministry of Finance of Russia dated June 28, 2010 No. 63n).

Read more about PBU 1/2008 in the material “ PBU 1/2008 “Accounting policies of the organization” (nuances)” .

How retained earnings from previous years are displayed

Retained earnings from previous years are accumulated in account 84. The balance on the credit of this account is transferred to balance sheet line 1370. Typically, there should be no movement in the debit of the account during the year, since profit distribution traditionally occurs at the end of the year after the annual meeting of the company's owners.

Retained earnings of the reporting year

The credit balance at the end of the year according to accounting account 99 is net profit. When reforming the balance sheet, it is written off to accounting account 84 (Dt 99 Kt 84) and constitutes retained earnings at the end of the reporting year.

In order to separate the indicators of retained earnings of the current (reporting) year from last year’s, some accountants allocate separate lines 1372 and 1372 in the balance sheet, which respectively reflect the retained earnings of the reporting period and previous years.

The use of retained earnings is the prerogative of the company's owners. And highlighting this financial indicator for different years in the balance sheet is primarily convenient for them. But it is worth keeping in mind that the retained earnings of the past year cannot be fully distributed without taking into account the company’s previous operating results.

IMPORTANT!It must not be allowed that the value of the company’s net assets, after transferring retained earnings of the reporting year for the payment of dividends, becomes less than the size of the company’s authorized capital even if there is a reserve fund. The caution applies to cases where uncovered losses were recorded in previous years. The decision to cover last year's losses from retained earnings of the reporting year is made exclusively by the owners of the company.

But retained earnings for previous years can be distributed by the participants/shareholders of the company not only at the end of the year, but at any time. The main thing is to hold a thematic meeting of all company owners and approve the appropriate decision.

Retained earnings: calculation formula

According to general accounting data, retained earnings are a company's net profit after taxes that can be distributed to the company's owners.

Based on global financial practice, retained earnings (hereinafter referred to as RR) are calculated using the following formula:

NPk = NPn - PE - Div,

where: NPk - NP at the end of the reporting year;

NPn - NP at the beginning of the reporting period;

PE - net profit remaining after accrual of income tax;

Div - dividends paid in the reporting year based on the NP of previous years.

If you do not have the NP value, then to calculate the NP you can use the following scheme:

• first calculate profit before tax (to determine it, calculate operating profit, which is defined as the difference between operating income and operating expenses);
• then subtract depreciation and interest costs from operating profit;
• Subtract tax from the resulting profit value.

Indicators for investors

When analyzing the financial condition of a company, investors pay attention to the use of retained earnings. If NP accumulates and is not put into circulation, this state of affairs should seem to suit investors, since they can count on significant dividends.

However, without investment in activities, the company stops growing, and its income not only does not increase, but may also decrease (due to a decrease in competitiveness, high wear and tear of equipment, and for other reasons related to the lack of investment). So a company that accumulates profits but does not invest in its activities cannot be attractive.

At the same time, a company that does not make a profit and does not pay dividends cannot interest investors at all.

The ideal option for investors is a company that invests the funds remaining after paying dividends in its development. Although the owners may decide not to pay dividends and direct the entire volume of NP into circulation.

Results

To reflect retained earnings (profit remaining after the amount of income tax or net profit has been withdrawn from it) in the balance sheet there is separate line. The figure entered into it corresponds to the amount of the entire net profit accumulated over the years of the company’s activity. During the reporting year, the value of retained earnings in accounting relating to this year can be seen in a separate accounting account. Dividends are paid out of net profit.