Statements of Retained Earnings, Accounting Theory & concepts

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Statements of Retained Earnings

This statement presents the changes in the retained earnings over an accounting period. The statement uses information from income statement and provides it to the statement of financial position as an input. This statement may be a part of owner’s equity in the balance sheet or it may be presented as a separate statement or as a part of income statement that derives total comprehensive income from the income statement less any dividends offered to the shareholders.

The term retained earnings refers to the portion of stockholders’ equity derived from profitable operations. Retained earnings are increased by net income earnings and are reduced by incurring losses and by the declaration of dividends.

Ending Retained Earnings (RE) = Beginning Retained Earnings (RE) – Dividend paid + Net Income

This equation will be helpful in calculating profit before tax for the use in cash flow statement.

Under International Accounting Stander – 1

Total comprehensive income is disclosed as amount attributable to the parent and non controlling interest.

Reconciliation b/w opening and closing balances for each item of equity

Every item of other comprehensive income

Owner ship transaction

Restrictions of Retained earnings:

Some portion of retained earnings may be restricted because of various contractual agreements. A restriction of retained earnings prevents a company from declaring a dividend that would cause retained earnings fall below a designated level. Most companies disclose restrictions of retained earnings in notes accompanying the financial statements.

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