Retained Earnings

The origin of the account retained earnings or earned surplus is different from other accounts appearing in the trail balance. For a new corporation, or one recapitalized in accounting sense, there would be no retained earnings account until the first actual or constructive closing of the revenue and expenses accounts. If the items of revenue exceed the item of expense, the income of the period is transferred to retained earnings account. The use of this account is required if the distinction between contributed capital and additions through earnings is to be maintained.  

In accounting, the retained earnings are defined as the portion of the net income that is retained by the corporation instead of it is distributed to its holders or owners as dividends. In the same way, if the corporation takes the loss, then that loss is retained and it is various names such as accumulated losses, accumulated deficit or retained losses. Retained earnings and retained losses are increasing (cumulative) from time to time or year to year with the losses offsetting earnings. Retained earnings are posted in the balance sheet of the shareholders' equity section. A complete report of the retained losses or retained earnings is presented in the Statement of Retained Losses or Statement of Retained Earnings.

Increasing usefulness of accounting for the retained earnings:

Since there is little merit in using the retained earnings account as a measure in any way of prospective dividends and because of it is conceivable that increments of assets resulting from profitable operations can be accounted for in terms of subsequent employment, an attempt will be made to explain how the accounting for retained earnings can shed light on results of reinvestments. If we are to enhance understandings rather to obscure it, a more positive program of accounting for corporate retained earning is required.

Questionnaire:

• What is retained earnings?
• What is the usefulness of accounting for the retained earnings?