Retained

Retained Earnings
Earnings

Retained earnings is net income that a company retains for

use in the business.

Net income increases retained earnings and a net loss

decreases retained earnings.

Retained earnings is part of the shareholders’ claim on the

total assets of the corporation.

A debit balance in retained earnings is identified as a deficit.

SO 6 Identify the items that are reported in a retained earnings statement.

Retained
Retained Earnings
Earnings Restrictions
Restrictions

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.
3. Voluntary restrictions.
Illustration 11-22

SO 6 Identify the items that are reported in a retained earnings statement.

Prior
Prior Period
PeriodAdjustments
Adjustments

Corrections of Errors
Result from:
 mathematical mistakes
 mistakes in application of accounting principles
 oversight or misuse of facts

Corrections treated as prior period adjustments

Adjustment made to the beginning balance of
retained earnings

SO 6 Identify the items that are reported in a retained earnings statement.

 Prior
Prior Period
PeriodAdjustments
Adjustments

Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011

Balance, January 1 $ 1,050,000

Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000

Before issuing the report for the year ended December 31, 2011, you discover a
$50,000 error (net of tax) that caused the 2010 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2010). Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2011?

SO 6 Identify the items that are reported in a retained earnings statement.

Prior
Prior Period
PeriodAdjustments
Adjustments

Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2011

Balance, January 1, as previously reported $ 1,050,000

Prior period adjustment - error correction (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000

SO 6 Identify the items that are reported in a retained earnings statement.

Retained
Retained Earnings
Earnings Statement
Statement

Transactions the Affect Retained Earnings

Illustration 11-24

SO 6 Identify the items that are reported in a retained earnings statement.

Retained
Retained Earnings
Earnings Statement
Statement
Illustration 11-25

SO 6 Identify the items that are reported in a retained earnings statement.