Statement of Retained Earnings

• Author: Vern Krishna
• Pages: 261-269

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Chapter 11: Statement of Retained

Earnings

A. OVERVIEW

e equity portion of a corporate balance sheet comprises two princi-

pal components: share capital and retained earnings. A corporation’s

retained earnings are its accumulated income, net of dividends and

other distributions to shareholders. If the balance is negative because

of accumulated losses, the account is called “Accumulated Decit,”

which appears in the equity segment of the balance sheet.

ere are very few transactions recorded directly into the retained

earnings account. Typically, the most common entry is a transfer of

the corporation’s net income for the year from the income summary

account to the retained earnings.

e rst important point to note is that retained earnings do not

represent cash or any other specic assets. Retained earnings is simply

a balancing account that derives from the fundamental balance sheet

equation:

A = L + E

E (Equity) has two components:

E = Capital + Retained Earnings.

Retained earnings is the dierence between assets and liabilities and

capital: