Question

What is the purpose of the retained earnings computation? Why is it important for users to analyze changes in this account? What will be the beginning balance in retained earnings in the following year? Can retained earnings be a negative amount? Why?

Answer 1

Retained earnings belong to the Shareholders of the company and hence it is important to compute the same.

Retained earnings is profit or loss earned by the company year on year. Such balance is accumulated and shown under Retained Earnings.

The shareholders are the owners of the company and any earnings of the year after paying all expenses and debentureholders belongs to the Shareholders. Hence, it is important to compute the Retained Earnings.

The importance of analysing the Retained Earnings is to all the users of the financial statements. The difference between last year retained earnings and this year is the amount of profit earned by the company.

Retained earnings contains different types of profit. Tha various types of profit help in analysing the amounts set aside for various reasons.

Beginning balance of retained earnings is the closing balance of last year.

Closing balance of last year becomes the opening balance of this year and year on year thus profit gets accumulated.

Retained earnings can have a negative balance as well. The company may incur losses and such losses also gets clubbed under Retained Earnings. Negative balance of retained earnings is shown as Accumulated Losses and shown on the debit side of Balance Sheet.

Year on year losses gets clubbed and retained earnings can have negative balance as well.