How to Classify Retained Earnings?

How to Classify Retained Earnings?

Retained earnings refer to the net income that the company has accumulated over some time. The company would use this amount of money to pay the shareholders in the form of a dividend. If a shareholder sells or buys the company’s shares, the company will also use the retained earnings to pay him in the form of compensation. Hence, retained earnings do not fall under the category of assets because they belong to the company’s shareholder, and the company will hold them as its additional capital.

When the accountants from an bookkeeping services in Singapore are preparing a balance sheet for business owners (Also see Tips to Become Intelligent Business Owners) , they will put the retained earnings in the company’s balance sheet under the shareholder’s equity (Also see Accounting – Balance Sheet – Liability and Shareholders’ Equity Accounts) section. As the retained earnings account is an equity account, it will normally have credit balances.

To calculate the sum of net retained earnings, business owners (Also see 3 Common Accounting Mistakes that Most Business Owners Make) should sum up the company’s retained earnings at the start of the accounting period and the net profit or loss in that period. Then, they need to minus the total dividends that the company has given to the shareholders from that sum. The resulting amount will be the amount of retained earnings.

A company can use retained earnings for many different purposes. As we have discussed above, the company can use them to distribute dividend at any time of the year. Companies can also keep the retained earnings so that they can use that amount of money in the future. For example, they can use them to fund for the development and expansion of the company. If the company has wound up, it may use the retained earnings as the compensation to its shareholders. Moreover, the company can issue bonus shares to its shareholders so that it can capitalise the retained earnings.

In short, we can say that the retained earnings are a portion of the net profit the business (Also see How Can You Improve Your Business?) has generated from various business operations after subtracting the dividend it pays to its shareholders. Thus, retained earnings are classified as shareholder’s fund. The shareholders can use the sum of retained earnings to calculate the return on equity (ROE). Companies will accumulate retained earnings so that they can use them for funding purposes in the future.

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