For any commercial organization, the main goal is to extract maximum profit from its activities, but not everyone who is going to engage in this business knows how to correctly take it into account and what indicators to pay attention to.
Any company manager is always interested in ensuring the optimal value of the retained earnings ratio, that is, providing himself with funds that can be distributed among the founders or left on the company’s accounts for the purpose of its further development.
Dear readers! The article talks about typical ways to resolve legal issues, but each case is individual. If you want to know how solve exactly your problem- contact a consultant:
APPLICATIONS AND CALLS ARE ACCEPTED 24/7 and 7 days a week.
It's fast and FOR FREE!
At the same time, you need to correctly understand how retained earnings are reflected correctly and how to maintain a balance sheet taking this indicator into account.
Definition
Retained earnings on the balance sheet is a certain amount of cash that is in the accounts of an organization after it has fully paid taxes to the state budget. In other words, it is simply “net profit” that can be distributed at the discretion of members of the company's management team.
In the vast majority of cases, this amount of funds is used to purchase new physical assets or expand the proposed one.
Asset or liability
Retained earnings on the balance sheet are a liability, since the value of this indicator shows the presence of the organization’s direct debt to its founders, since ideally this amount is fully distributed among members of the management team and invested in the further development of the business. In fact, the company does not have the right to dispose of its retained earnings until the owners of the organization make an appropriate decision.
It is worth noting that the loss reflected in line 1370 should also be located on the liability side of the balance sheet, but in this case it is a negative value, and therefore the number will need to be placed in parentheses.
Formation and what it includes
Any result obtained from the sale of any product or the provision of its own services by the company must be reflected in the active-passive account 90, and the debit of this account indicates, and other expenses, while the credit indicates the revenue received, and the final balance in the future it should be transferred to account 99.
In this case, only two entries will need to be made in the accounting book: Dt 90, Kt 90 – receipt of income; Dt 99, Kt 90 – receipt of expenses. All operations of the company related to non-operating and operational must be reflected in account 91.
In particular, this applies to:
- sale or temporary lease of any company assets;
- revaluation or depreciation of non-current assets;
- any operations that involved foreign currency;
- investments in the business of other organizations;
- donation or liquidation of any property;
- profit and costs received from transactions with securities.
In this case, only two entries are also indicated: Dt 91, Kt 99 – receipt of income; Dt 99, Kt 91 – receipt of expenses. This procedure in the professional environment is usually called balance reformation.
Retained earnings can expand if any errors are discovered that cause expenses to be overstated, and also if shareholders do not claim their own dividends within three years from the date they were accrued. Likewise, any errors that result in overstated profits will ultimately reduce the amount of funds accumulated.
The components of retained earnings do not always represent direct cash in the form of an amount in a current account or cash, and this also must be taken into account in the process of conducting economic analysis.
During the last days of the reporting year, the accountant will also need to write off the final balance from account 99 to account 84, making two more entries in parallel: Dt 99, Kt 84 - receipt of income; Dt 84, Kt 99 – receipt of expenses.
Ultimately, account 99 is reset, and no further operations will be carried out on it until the end of the current year. In this case, account 84 refers to active-passive, and before entering the total amount of undistributed funds into it, you need to subtract the amount of tax from it.
Calculation formula
The formula used to calculate retained earnings provides for the addition of net profit to the initial amount of accumulated funds, with the further deduction of dividends paid to shareholders.
In other words, the formula itself will look like this: NNP + PE-D.
Past reporting years
Retained earnings preserved from previous years can be seen in accounting account 84. It is worth noting the fact that the balance balance on the credit of this account must always be transferred to balance sheet line 1370, and during the year there should be no movement on the credit of this account , since profits in an organization are traditionally distributed only after the results of the annual meeting of founders have been summed up.
Difference from net profit
Net profit must be reproduced in the company's financial statements, and in itself it is characteristic of any modern organization. At the same time, retained earnings must be reproduced in the balance sheet, taking into account the payment of dividends to the owners of the organization. Thus, in some cases, given the right circumstances, these two types of income may be exactly the same, and sometimes they may differ by the amount of deferred tax payments.
How is retained earnings displayed on the balance sheet (account 1370)
Net profit is always indicated on the balance sheet of account 99 at the end of the reporting period, and this indicator serves as a demonstration of the final economic result of the organization’s financial activities over a certain period of time.
It is worth noting the fact that in the balance sheet the reproduction of the economic result is carried out in the form of retained earnings, that is, in such a way that all kinds of taxes and other payments are subtracted from the final economic result, including also fines that were imposed on the company due to violation of the rules of the current tax legislation.
When they say that the payment of dividends and VAT is carried out from net profit, this is also true, but in accounting, the net profit received during the reporting period is strictly distributed and its use from the account of retained earnings in accordance with the statutory goals of the company.
In the balance sheet, it is necessary to indicate IR not only for the reporting period of time, but also for the entire period of the organization’s activities, calculated using the standard formula “profit minus taxes.”
Upon liquidation
The calculation of retained profits during liquidation must be carried out by a specialized commission that has the appropriate powers, and it is carried out as follows: the participants are paid the distributed but not yet paid share of income, after which the profit is distributed among the participants in accordance with their parts in the authorized capital of the organization.
The VAT of the liquidated company must be paid in full, that is, taxes on any transactions performed are first filled out and paid.
Uncovered loss
In order to reflect losses for the current year, you can open a separate subaccount 84.4. If it cannot be covered by income received over the past years, the founders may decide to leave it on the balance sheet or repay it through the use of other sources of financing. In such a situation, it is left uncovered, after which the negative value must be moved to line 1370.
In the process of preparing annual reporting, all data on uncovered losses for the current and past years must be posted among subaccounts to account 84. In this case, 84.2 indicates the value for the current year, while 84.4 indicates the value for the past.
Coverage sources
The resulting loss demonstrates how much equity has decreased in the liability side of the organization's balance sheet, and it can be written off using different methods.
The following entries for sources of loss coverage may be indicated:
Indicators for investors
In the process of analyzing the financial condition of any organization, potential investors must look at how retained earnings are used. If it gradually accumulates and is not put into circulation, this is an acceptable option for investors, since if they invest in the work of this organization, they will have the opportunity to count on receiving greater profits.
At the same time, without investment in work, the company gradually ceases to develop, and therefore its profits may not only not show any growth, but also systematically decline. In this regard, accumulating profits that are not invested in its own activities can make the company unattractive to potential investors.
At the same time, if a company, in principle, does not make a profit and cannot even pay any dividends, it is, in principle, of no interest to potential investors.
The ideal option from the point of view of investors is such a company operation in which those funds that were received after the final payment will be reinvested in the development of the organization, even if the owners decide in principle not to receive any dividends, completely directing the entire available volume of retained earnings into circulation
Income distributions
If a company has a certain amount of undistributed income, its founders must independently decide how best to use the funds received.
Thus, any profit received during previous reporting periods and the current year can be used:
- to pay dividends to each of the owners of this organization in accordance with his personal share in;
- for the creation and constant replenishment of reserve capital, the funds of which will be needed and can be used when certain circumstances arise;
- to expand the company’s authorized capital, which will make it more attractive to both investors and creditors, demonstrating the reliability of the organization;
- for any other purposes that the owners of the organization consider important, including the provision of charitable assistance, the formation of all kinds of specialized funds and much more, which is widely used today.
What influences the value
Attention!
Attention!
when filling line 1370when preparing interim reporting?
Line 1370 “Retained earnings (uncovered loss) = +- Account balance 99 +- Account balance 84 in terms of retained earnings (uncovered loss)
This line reflects the amount of retained earnings or uncovered losses of the organization.
What influences the valueretained earnings (uncovered loss)?
The amount of retained earnings (uncovered loss) during the reporting period may change as follows:
— increase (decrease) by the amount of net profit (net loss) of the reporting period;
— decrease by the amount of accrued dividends (including interim);
— increase by the amount of declared and unclaimed dividends, the statute of limitations for which has expired (Letter of the Ministry of Finance of Russia dated January 27, 2012 N 07-02-18/01);
— increase by the amount of additional capital from the revaluation of non-current assets disposed of in the reporting period (clause 15 of PBU 6/01, clause 21 of PBU 14/2007);
— decrease due to an increase in the authorized capital at the expense of retained earnings;
— increase due to a decrease in the authorized capital when it is brought to the value of net assets;
— decrease due to the direction of retained earnings to the reserve fund;
The value of line 1370 “Retained earnings (uncovered loss)” as of the reporting date is equal to the value of line 2400 “Net profit (loss)” of the Income Statement only if the organization at the beginning of the reporting period does not have retained earnings (uncovered loss) from previous years , during the reporting period, interim dividends were not distributed and previously overvalued fixed assets were not disposed of (Instructions for using the Chart of Accounts, paragraphs 79, 83 of the Regulations on Accounting and Financial Reporting, paragraphs 1, 2 of Article 42 of the Law N 208-FZ, clause 1, article 28 of Law N 14-FZ).
Attention!
According to paragraphs. 1 clause 9 PBU 22/2010, significant errors of the previous reporting year, identified after the approval of the financial statements for this year, are corrected by entries in the corresponding accounting accounts in the current reporting period. In this case, the corresponding account in the records is account 84 “Retained earnings (uncovered loss)”. Consequently, if the organization, using records from 2014, corrected significant errors of 2013 or previous years, identified after the approval of the financial statements for the corresponding year, then the indicator of line 1370 “Retained earnings (uncovered loss)” of the Balance Sheet for the reporting period of 2014, in which correctional entries have been made will be formed taking into account the corrective entry.
The amount of the organization’s net profit for the reporting period in accounting is reflected in the credit of account 99 “Profits and losses”, and the amount of net loss is reflected in the debit of account 99.
With the final turnover of December, the amount of net profit (loss) of the reporting year is written off to account 84 “Retained earnings (uncovered loss)” (Instructions for using the Chart of Accounts). The amount of retained earnings is accounted for as a credit to account 84, and the amount of uncovered loss is recorded as a debit for account 84.
The accrual of dividends (both interim and at the end of the year) is reflected in the debit of account 84 in correspondence with accounts 75 “Settlements with founders”, subaccount 75-2 “Settlements for the payment of income”, and 70 “Settlements with personnel for wages” ( Instructions for using the Chart of Accounts). A reverse entry is made for the amount of declared but not claimed dividends for which the statute of limitations has expired (Letter of the Ministry of Finance of Russia dated January 27, 2012 N 07-02-18/01).
Attention!
The distribution of profit based on the results of the year refers to the category of events after the reporting date, indicating the economic conditions in which the organization conducts its activities that arose after the reporting date. At the same time, in the reporting period for which the organization distributes profits, no entries are made in accounting (synthetic and analytical) accounting. And when an event occurs after the reporting date in the accounting of the period following the reporting one, in general order an entry is made reflecting this event (clauses 3, 5, 10 of PBU 7/98). Consequently, data on account 84 in the reporting year is formed taking into account the decision made in the reporting year on the distribution of profit received based on the results of the previous year.
The formation in accounting of information on the areas of use of funds of retained earnings is ensured by organizing analytical accounting for account 84 “Retained earnings (uncovered loss)”. At the same time, in analytical accounting, funds of retained earnings used as financial support for the production development of the organization and other similar activities for the acquisition (creation) of new property and not yet used can be divided (Instructions for using the Chart of Accounts, Letter of the Ministry of Finance of Russia dated November 14, 2012 N 07-02-12/60). Thus, the use of retained earnings for the development of the organization’s production does not lead to either a change in the balance of account 84 or a change in the indicator of line 1370 “Retained earnings (uncovered loss).” Expenses incurred by the organization are recognized in the reporting period when they occurred, regardless of the presence (absence) of a source of financial support (production development funds, consumption funds and other similar funds), as well as the period (time) of their formation (Appendix to the Letter of the Ministry of Finance Russia dated 02/06/2015 N 07-04-06/5027).
What accounting data is used?when filling line 1370“Retained earnings (uncovered loss)”when preparing interim reporting
When filling out this line of the Balance Sheet compiled during the preparation of interim financial statements for the reporting period, data from accounts 99 and 84 are used. If, as a result of calculations using the formula below, a negative value is obtained (i.e., an uncovered loss), then it is shown in the Accounting Sheet balance sheet in parentheses.
Line 1370 “Retained earnings (uncovered loss) = Account balance 84 in terms of retained earnings (uncovered loss)
The indicators in line 1370 “Retained earnings (uncovered loss)” as of December 31 of the previous year and as of December 31 of the year preceding the previous year are generally transferred from the Balance Sheet for the previous year.
Let us recall that it is necessary to ensure comparability of data on the amount of retained earnings as of the reporting date, as of December 31 of the previous year and as of December 31 of the year preceding the previous one. If the organization’s accounting policies have undergone changes since 2014, then the consequences of these changes are reflected in the financial statements retrospectively (clauses 14, 15 of PBU 1/2008). That is, comparative indicators indicated in the columns “As of December 31, 2013” and "As of December 31, 2012" on line 1370 “Retained earnings (uncovered loss)”, as well as related items, must be adjusted as if the new accounting policy had been applied from the moment the facts of economic activity of this type arose.
In addition, if an organization in the reporting period corrected significant errors of the previous year, the financial statements for which were approved, then the indicator of retained earnings (uncovered loss) as of December 31 of the previous year and as of December 31 of the year preceding the previous one is recalculated as if the error of the previous reporting period was never allowed (retrospective recalculation) (clause 2, clause 9 of PBU 22/2010).
If errors of earlier reporting periods (years preceding the previous year) were corrected, then the indicator of retained earnings (uncovered loss) as of December 31 of the year preceding the previous one is also subject to recalculation.
The exception is cases when it is impossible to establish a connection between an error and a specific period or it is impossible to determine the impact of this error cumulatively in relation to all previous reporting periods.
The Russian Ministry of Finance recommends that interim dividends paid during the year for which financial statements are prepared be reflected in the annual Balance Sheet separately in section. III (in parentheses) (Letter dated December 19, 2006 N 07-05-06/302). If an organization decides to follow this recommendation, it will need to provide in Sec. III separate line, for example line 1371 “including interim dividends”.
If in the reporting year, in the previous year and (or) in the year preceding the previous one, the organization accrued interim dividends, then the procedure for their reflection (with or without allocation in a separate line) for each of the dates should be the same.
Example of filling line 1370“Retained earnings (uncovered loss)”when preparing annual reports
Indicators for account 84 (the organization does not keep records of special funds in account 84): rub.
Fragment of the Balance Sheet for 2013
Solution
The amount of retained earnings is:
The amount of accrued interim dividends is:
In this case, a fragment of the Balance Sheet will look like this.
Definition
retained earnings(uncovered loss) – the final financial result of the company’s activities for the reporting year, one of the components of liabilities, i.e. the company’s sources of funds, included in the “Capital and Reserves” section of the Balance Sheet.
Retained earnings represent the company's profit for the reporting year minus income tax, dividends, penalties for violation of tax laws and other expenses at the expense of profits (clause 83 of the Regulations on accounting and financial reporting in the Russian Federation, approved by Order of the Ministry of Finance of the Russian Federation dated July 29, 1998 N 34n).
An uncovered loss is a company's loss for the reporting year that is not covered by relevant sources.
How is retained earnings (uncovered loss) formed and used?
Also, the net profit indicator decreases when:
Increasing the authorized capital at the expense of retained earnings;
Direction of retained earnings to the reserve fund.
The use of retained earnings for expenses, for example, as a source of capital investments, is reflected only in analytical accounting by reserving the corresponding amount in a special subaccount (subaccount) of the account, for example:
Sub-account (sub-account) “Retained earnings (uncovered loss)”
Subaccount (subconto) “Use of retained earnings as a source of capital investments.”
The increase in the balance of uncovered loss, reflected in the debit of the account, occurs due to the reflection of the loss of the reporting year, which is debited to the account from account 99 “Profits and losses” with the final turnover of December of the reporting year
The indicator of uncovered loss increases the correction in the reporting period of significant errors of previous years made by companies that are not small enterprises, which led to an understatement of expenses in the period of errors (clause 1, clause 9, clause 14 of PBU 22/2010).
Repayment of uncovered losses from relevant sources is reflected in the credit of account 84 “Retained earnings (uncovered loss)” in correspondence with the accounts:
Retained earnings (uncovered loss): details for an accountant
- Practical aspects of accounting for business combinations in the fuel and energy sector
Authorized capital 10,000 1,000 Retained earnings 37,000 6,500 Liabilities 6,000 ... disposal of investment 975 7. Consolidated retained earnings as of December 31... (25%) Company D (65%) A Retained earnings 37,0001 7,000 – 1,000 = 60002 ... 12.2018 38,260 1 Retained earnings of the parent company as of... acquisition of control, then for the consolidated retained earnings of the M + D group it... capital 10,0007 10,000 Retained earnings and other reserves Calculation...
- Accounting for factoring companies attracting external financing
99 (profits and losses) 84 (retained earnings) 404,366,857 Net profit... 99 (profits and losses) 84 (retained earnings) 43,776,000 Net profit... 99 (profits and losses) 84 (retained earnings) 9 000,000 Net profit... 99 (profit and loss) 84 (retained profit) 404,042,857 Net profit... 99 (profit and loss) 84 (retained profit) 404,366,857 Net profit...
- taxCOACH® analysis: capital amnesty. Should I report my assets abroad before February 28, 2019?
At the beginning of March 2018, Russian citizens were hit by a second wave of capital amnesty. Time will tell how effective it will be. However, the first stage of the amnesty in 2016, according to the head of the Russian Ministry of Finance Anton Siluanov, “did not give the expected results that were expected.” According to media reports, as part of the first wave of capital amnesty, only 7,200 special declarations were filed, and less than $100 million were declared, with an annual capital outflow of $25-30 billion. That is, a drop in the ocean in scale...
- Major bug fixes
Rub.; - on line 1370 “Retained earnings (uncovered loss)” - 2 million... and losses”; Debit account 84 “Retained earnings (uncovered loss)”, Credit account 99 ... as follows: Debit account 84 “Retained earnings (uncovered loss)”, Credit account 60 ... (retrospective recalculation) on line 1370 “Retained earnings ( uncovered loss) balance sheet for...
- Deoffshorization, CFC and exchange of tax information in 2017
Income is more than 10 million - then retained earnings should be included in the base...