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Retained earnings and Other Statements Closed

Can someone explain to me what retained earnings are? Why are these other statements closed at the end of a period? Is that helpful in understanding the company's financial situation?

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What It Is:

Retained earnings are the sum of a company's profits, after dividend payments, since the company's inception. They are also called earned surplus, retained capital, or accumulated earnings.

How It Works/Example:

Let's assume Company XYZ has been around for five years. During this time, it reported the following net income:

Year 1: $10,000
Year 2: $5,000
Year 3: -$5,000
Year 4: $1,000
Year 5: -$3,000

Assuming Company XYZ paid no dividends during this time, XYZ's retained earnings equal the sum of its net profits since inception, or in this case, $8,000. In subsequent years, XYZ's retained earnings will change by the amount of each year's net income, less dividends.

Why It Matters:

It is important to understand that retained earnings do not represent surplus cash or cash left over after the payment of ...

Solution Summary

The expert defines retained earnings and other statements closed.