Learn On Your Own Accounting Entries For Retained Earnings:

Retained Earnings refer to that percentage of net earnings of a company that have not been distributed to the shareholders as dividends, but are retained by the company to be reinvested in the business for further growth or to pay off liabilities (at the discretion of its board of directors). Retained Earnings is also called plowing back of profits is cumulative profits because after every accounting year, some amount of profits may be retained at the discretions of the Board of Directors.

Why Retained Earnings Are Shown As Liability ?

When the management of a company decides that some percentage of the earnings should be retained, they have to account for them on the Balance Sheet under the head "Shareholder Equity". Retained Earnings (RE) can be viewed as liability of the business towards the shareholders, partners, and proprietors as it is their capital which has earned these profits.

The formula to calculate retained earnings is as follows:

Retained Earnings (RE) = Retained Earnings (RE) + Net Income During The Accounting Period - Dividends Paid.

Formula For Calculation Of Retained Earnings:

The formula to calculate retained earnings is quite simple. The figure is calculated by adding the net profits (less dividends paid) to the beginning retained earning balance from a previous period:

Retained Earnings (RE)=Beginning RE+Net Income - Dividends

If there is a net loss and it is larger than the beginning retained earnings, there will be what is called negative retained earnings.

Journal Entries For Retained Earnings: For Profits Earned During The Year:

Profit And Loss A/c--------------------- Dr.

        To Retained Earnings A/c

(Being the amount of profits retained transferred)

For Loss Suffered During The Year:

Retained Earnings A/c--------------------- Dr.

        To Profit And Loss A/c

(Being the amount of loss suffered transferred)