Retained earnings are the portion of a company’s net income that is not distributed as dividends to shareholders but is reinvested in the business. It represents the accumulated profits of the company that are available for future use. Retained earnings are an important source of internal financing for a company, as they can be used to fund growth, expansion, and other business activities.
Key Facts
- Retained Earnings Account: In QuickBooks Online, the Retained Earnings account represents the total income and expenses of your company from all previous years.
- Automatic Calculation: When a new fiscal year starts, QuickBooks Online automatically adds the net income from the previous fiscal year to your Balance Sheet as Retained Earnings.
- Formula: The formula to calculate retained earnings is: Retained Earnings (RE) = Beginning RE + Net income – Dividends.
- Net Income: Net income is the total amount a company makes after taxes and expenses. It directly affects retained earnings.
- Dividends: Dividends refer to the distribution of money from the company to its shareholders. Dividends paid out to owners or shareholders reduce retained earnings.
Calculating Retained Earnings
The formula for calculating retained earnings is as follows:
Retained Earnings (RE) = Beginning RE + Net income – Dividends
- Beginning RE: The retained earnings balance at the beginning of the accounting period.
- Net income: The net income of the company for the accounting period.
- Dividends: The dividends paid to shareholders during the accounting period.
Retained Earnings on the Balance Sheet
Retained earnings are reported on the liability side of the balance sheet under the shareholder’s equity section. They are typically presented as a separate line item, although some companies may combine them with other equity accounts, such as paid-in capital.
Importance of Retained Earnings
Retained earnings are an important financial metric for a number of reasons. They can be used to:
- Assess a company’s financial health: Retained earnings can be used to assess a company’s financial health and stability. A company with a large amount of retained earnings is generally considered to be in a stronger financial position than a company with a small amount of retained earnings.
- Make investment decisions: Retained earnings can be used to make investment decisions. A company with a large amount of retained earnings may be able to invest in new projects or expand its operations.
- Pay dividends: Retained earnings can be used to pay dividends to shareholders. Dividends are payments made to shareholders out of the company’s profits.
Limitations of Retained Earnings
While retained earnings are an important financial metric, they also have some limitations. These limitations include:
- Retained earnings are not a measure of cash flow: Retained earnings are not a measure of cash flow. A company with a large amount of retained earnings may not have a lot of cash on hand.
- Retained earnings can be manipulated: Retained earnings can be manipulated through accounting practices. For example, a company can increase its retained earnings by deferring expenses or capitalizing assets.
Conclusion
Retained earnings are an important financial metric that can be used to assess a company’s financial health, make investment decisions, and pay dividends to shareholders. However, retained earnings also have some limitations, such as the fact that they are not a measure of cash flow and can be manipulated.
Sources:
- https://quickbooks.intuit.com/learn-support/en-us/help-article/financial-reports/view-retained-earnings-account-details/L7d6Ugx58_US_en_US
- https://quickbooks.intuit.com/uk/blog/what-are-retained-earnings/
- https://quickbooks.intuit.com/global/resources/expenses/retained-earnings-formula/
FAQs
How does QuickBooks calculate retained earnings?
QuickBooks calculates retained earnings using the following formula:
Retained Earnings (RE) = Beginning RE + Net income – Dividends
- Beginning RE: The retained earnings balance at the beginning of the accounting period.
- Net income: The net income of the company for the accounting period.
- Dividends: The dividends paid to shareholders during the accounting period.
Where can I find retained earnings in QuickBooks?
Retained earnings can be found on the liability side of the balance sheet under the shareholder’s equity section.
How often does QuickBooks calculate retained earnings?
QuickBooks calculates retained earnings at the end of each accounting period, which is typically monthly, quarterly, and yearly.
Can I adjust retained earnings in QuickBooks?
Yes, you can adjust retained earnings in QuickBooks. However, it is important to note that adjusting retained earnings can have a significant impact on your financial statements. Therefore, it is important to consult with an accountant before making any adjustments.
How do I view a detailed breakdown of retained earnings in QuickBooks?
To view a detailed breakdown of retained earnings in QuickBooks, you can run a Profit and Loss report. The Profit and Loss report will show you all of the transactions that make up the net income or loss that QuickBooks automatically transferred to your Retained Earnings account.
What is the difference between retained earnings and net income?
Net income is the total amount of money that a company makes after subtracting all expenses, including taxes. Retained earnings are the portion of net income that is not distributed to shareholders as dividends.
What is the difference between retained earnings and cash flow?
Retained earnings are the portion of net income that is reinvested in the business. Cash flow is the movement of money into and out of a business.
What are some of the limitations of retained earnings?
Some of the limitations of retained earnings include:
- Retained earnings are not a measure of cash flow.
- Retained earnings can be manipulated through accounting practices.
- Retained earnings do not take into account the time value of money.