Retained income is an uncovered loss. Retained earnings from previous years in the balance sheet. General points and differences from uncovered losses

For joint-stock companies, other companies and other organizations, the amount is not covered in the manner prescribed by law from their own sources.

The uncovered loss is determined taking into account payments to the budget and other expenses repaid at the expense of, and shows the amount of the uncovered loss as of the reporting date, regardless of the time of its formation.

A loss may result from:

• excess of expenses over income for financial and economic activities and non-operating operations;
• identification of significant errors from previous years in the reporting year;
• changes .

Reasons for receiving an uncovered loss:

• receiving actual negative results from the company’s activities due to excess costs over income;
• changes in accounting policies that had an impact on the financial condition of the company;
• errors found in the current year that were made in previous years that affected the financial result.

In accounting, an uncovered loss is reflected in a separate account “Retained earnings (uncovered loss)” (see), is recorded as its debit, and amounts used to cover the loss are recorded as a credit. The debit balance of the account can be shown either in the asset of the balance sheet (its currency increases by this amount), or in the liability of the balance sheet with a decrease in the amount of the uncovered loss in the balance sheet currency.

The loss (both previous years and the current year) can be covered by (the fund) and targeted contributions from the owners of the company. If the available sources to repay the uncovered loss of the reporting year are not enough, the uncovered loss is left on the balance sheet. If the organization does not have sources to repay losses, then the founders of the company may decide to cover them through additional contributions.

The write-off of the loss of the reporting year from the balance sheet is reflected in the credit of the account “Retained earnings (uncovered loss)” in correspondence with the accounts: “Authorized capital” - when the amount of the authorized capital is brought to the value of the organization’s net assets; “Reserve capital” - when funds from reserve capital are used to pay off losses; “Settlements with founders” - when repaying the loss of a simple partnership at the expense of targeted contributions of its participants, etc.

The account “Retained earnings (uncovered loss)” is organized in such a way as to ensure the formation of information on the areas of use of funds.

Uncovered loss is the final financial result obtained based on the results of the organization’s activities for the reporting year; characterizes the decrease in its capital. Distinguish uncovered loss without taking into account the decision to cover the loss fully or partially at the expense of relevant sources (distribution of losses between participants) and uncovered loss taking into account the decision to cover the loss(distribution of loss between participants) - the first is shown as a net loss, the second - in (section “Capital and reserves”).

Retained earnings (RE) is a common accounting concept that many businesses encounter. This term stands for funds received through the business activities of a company and available to it after paying tax deductions, dividends, fines, etc. Simply put, all mandatory payments.

An alternative name for retained earnings is retained surplus. In some cases, the concept of “profit retention rate” is used.

The main difference between retained earnings and net profit is that it is always calculated not only for a specific period, but also for the total life of the enterprise. Whereas net profit is determined only for the reporting period. But at the end of the year, which is logical, both indicators may be the same.

Retained earnings in the balance sheet relate to the passive part of funds. By default, it is believed that it should be distributed among the owners and used to optimize the company’s business model. Until this point, such profit can only be called the company’s debt to its owners. Refers to long-term sources of financing, therefore the goal of the company’s financial strategy should be its mandatory accumulation.

What to do with retained earnings

There are several main ways to refer an NP. Among them:

• payment of dividends to owners/shareholders;
• compensation for earlier losses;
• accumulation of reserve fund funds;
• other goals agreed upon by managers.

IMPORTANT! Regarding the last point, it is worth making a small clarification. In this case, managers do not mean nominal officials, but business owners. As a rule, they resolve such issues during the final annual meeting, at which the corresponding minutes are drawn up.

What determines the size of retained earnings?

The indicator may differ in different reporting periods. It is influenced by such things as:

• the amount of dividends paid to the owners of the company;
• change in net profit;
• increase or decrease in the value of commodity assets;
• changes in overhead costs;
• revision of tax rates;
• change in the company's business strategy.

Retained earnings. Check

All NP for the past years is summarized in accounting account 84, the balance credit balance is placed in line 1370 of the balance sheet. The same line contains the amount of uncovered loss (if any), which is indicated in parentheses. Uncovered loss means the difference between the company's expenses and income during the year, according to which the first point exceeds the second.

The account contains information about the denomination and changes in the amount for the reporting year. At the end of the year, the amount is credited to account 84, while the loss is written off as a debit. The main task of this account is to store information about the purposes for which the funds were used.

An uncovered loss is sometimes called a deficit profit. The loss can be fully or partially compensated using reserve capital funds. In the case of compensation, data on the initial loss is not filled in (in case of partial compensation, only the remaining amount of the loss is indicated in parentheses).

IMPORTANT! At the request of the accounting department, additional lines – 1371 and 1372 – can be entered in the balance sheet to differentiate the figures for the reporting and previous years.

Calculation of retained earnings. Detailed formula

So, we found out that retained earnings are the amount of funds remaining at the disposal of the company’s owners after all taxes and other mandatory deductions. This indicator can be calculated using the formula:

HPk = HPn + ChP – D

• PE – net profit minus income tax;

Note: The standard reporting period is one year.

If during the current period the company received a net loss instead of profit, the formula takes on a slightly different form:

NPk = NPn – CHU – D

• HPc – surplus of funds at the end of the reporting period;
• HPn – the same indicator at the beginning of the period;
• NL – net loss;
• D – dividends distributed for the reporting period, based on the RR of the previous periods.

The remaining indicators are similar to the previous formula.

Keep your balance. Rational allocation of NP funds

It is believed that scaling the business should be a priority goal when determining where retained earnings will go. Proper reinvestment can increase the overall profitability of a business and the stock market value of its shares. Which, in turn, will be a major advantage for investors. Banal payment of dividends is good only in the short term, while progressive development creates the potential for stable long-term earnings. If the company does not grow, investors will not see this potential and will want to increase dividends now, which is not desirable from a financial point of view for the company itself.

On the other hand, even taking into account the logic of the above, discussions often arise between the directorate and the management department of the enterprise regarding where to direct retained earnings.

If management is opposed to allocating funds to pay dividends and wants to use them exclusively for the implementation of new projects, shareholders may decide to sell shares.

As a result, the company's stock quotes will decline, as will its market capitalization.

Therefore, it is important for financial management to adhere to the so-called golden mean, providing investors with the profitability they expect, and at the same time directing funds to the development of the company.

Investments from the amount of retained earnings are often directed to the purchase of new equipment, marketing research, technology improvement and other items on which the further competitiveness and financial success of the business largely depends.

The most important economic indicator showing the effective operation of a company is retained earnings. The positive dynamics of this indicator, along with other economic indicators, may indicate the positive performance of the company. Let's look in this article at what retained earnings are, where is it reflected on the balance sheet, and in what account is it recorded?

The concept of retained earnings

Retained earnings (loss) consists of such indicators as NP (loss):

• Current year;
• Previous years.

Only the owners of the company can dispose of this profit; this happens at the general meeting of shareholders, in accordance with the provisions provided in the constituent documents. Actions to dispose of profits are recorded in the minutes of the general meeting and this serves as the basis for the accountant to create entries for the use of profits.

Retained earnings account

The company's NP is formed after carrying out the procedure for reforming the balance sheet in the 1C Accounting program. This happens with the last accounting entry, in which account 99 “Profits and losses” is closed to account 84 “Retained earnings (uncovered loss)”. And after this, the profit is distributed (used) on account 84.

Retained earnings in reporting

NP is taken into account in the liability balance sheet and is reflected in line 1370. It is shown on an accrual basis from the beginning of the company’s activities. Retained profit is net profit - this is the amount remaining after paying all taxes and after distributing shares between the owners, that is, the final result in account 84. If the company is closed (liquidated), then the amount of accumulated profit will be distributed among the owners (shareholders) of the company, therefore they are primarily interested in the positive result of this indicator.

But this line of the balance sheet can reflect not only profit, but also an uncovered loss of the company, this is when expenses exceed income. It is reflected in the balance sheet in parentheses. This can add up (accumulate):

• At the end of the financial year;
• From previous years.

Example: Leader LLC had the following indicators at the end of the financial year:

• Revenue from the sale of goods (services) – 50 million rubles.

including:

— sales of pasta – 30 million rubles.

— sales of agricultural products – 10 million rubles.

— sales of motor transport services – 10 million rubles;

• Non-operating income – 10 million rubles;
• The cost of goods (services) and distribution costs associated with the sale of goods and own services – 40 million rubles;
• Other expenses – 25 million rubles.

The uncovered loss amounted to 5 million rubles at the end of the financial year. (50 + 10 – 40 – 25).

If the company’s activities began only in the current period, then the data in the accounting. forms: the “Retained Earnings (Loss)” page of the Balance Sheet and the “Net Profit (Loss)” page of the Income Statement will be the same.

Retained earnings for external users

NP is important only to the shareholders (owners) of the company, but also to external users (investors, bank employees, regulatory authorities).

Investors are interested in where this indicator is spent.

It can be spent:

• To pay dividends to shareholders;
• To pay off losses from previous periods of the company’s activities;
• To inject investment flows into the development of the company (for example: acquisition of fixed assets, equipment, etc.);
• To increase the authorized capital;
• To create a reserve fund;
• For other purposes established by legislative acts of the Russian Federation.

If a loss is received, it can be repaid from the following sources:

• At the expense of shareholders’ own funds;
• Due to the profit received from previous periods of the company’s activities;
• Through the use (reduction) of the authorized capital;
• By using (reducing) the reserve fund.

It is important for investors that more profits are spent not on paying dividends, but on the company’s investment activities. But it is also important for them that the profit received before distribution increases every year, and not decreases.

Accounting entries for the use of profit (loss absorption)

The use of the organization's retained earnings is reflected in the following accounting entries in the accounting accounts:

The repayment of the company's loss is reflected in the following accounting entries in the accounts:

retained earnings(or a loss that was not covered) at the end of the reporting period is displayed in line 1370 of the balance sheet. It records the result obtained cumulatively over several years.

Is it true that retained earnings are net profits?

Retained earnings are truly net profits that (as the name suggests) were not distributed (divided) among the participants/shareholders of the company. Net profit is considered to be that part of income from sales and non-sales operations that remains after paying taxes.

The decision on how to distribute this income rests solely with the owners. Traditionally, the issue of retained earnings is put on the agenda of the annual meeting of the company's owners. The adopted decision is documented in minutes, which are drawn up following the results of the general meeting of participants/shareholders.

The main ways of spending retained earnings are considered to be in the following directions:

• to pay dividends to participants/shareholders;
• repayment of past losses;
• replenishment (creation) of reserve capital;
• other goals formulated by the owners.

Is retained earnings an asset or a liability?

Retained earnings on the balance sheet are, of course, a liability. The value of this indicator indicates the company’s actual debt to its owners, since ideally this profit should be distributed among the participants and invested in the further development of the business.

In fact, the company cannot dispose of retained earnings without the owners making a decision. The loss reflected in line 1370 is also on the passive side of the balance sheet, only this is a negative value, so the number is placed in parentheses.

Our article will help you better understand balance analysis "How to Read a Balance Sheet (Practical Example)?" .

Retained earnings and uncovered losses - what are they?

As mentioned above, retained earnings are the final income received by the company from its business activities, remaining after the transfer of income taxes and not yet divided (not directed to other purposes) by its owners.

Example 1

Voskhod LLC in 2018 made a profit of 800,000 rubles and paid income tax in the amount of 160,000 rubles. In line 1370 in the balance sheet liability at the end of 2018, Voskhod LLC should reflect 640,000 rubles. This is retained earnings.

The value in line 1370 of the balance sheet may be equal to that indicated in line 2400 of the financial results report if the company had no profits not distributed by the owners at the beginning of the year and no interim dividends were paid during the year.

Our article will help you read balance sheets correctly “Deciphering the lines of the balance sheet (1230, etc.)” .

As for the uncovered loss, this is the excess of the company's expenses over income at the end of the year.

Example 2

In 2018, Parus-Trade LLC received revenue from the provision of services and other non-operating income. Their total amount was 400,000 rubles.

The costs associated with conducting the main activity (transportation) are equal to 380,000 rubles. Other company expenses (not taken into account for tax purposes) amounted to another 58,000 rubles. Profit tax was assessed in the amount of RUB 4,000. Parus-Trade LLC has no reserve capital.

This means that at the end of 2018, after the balance sheet reformation, an entry of 42,000 rubles will appear in line 1370 in parentheses. (400,000 - 380,000 - 4,000 - 58,000).

An uncovered loss occurs when the company receives an actual loss and there are no financing reserves. The value entered in the liability side of the balance sheet in parentheses will reduce the total for section 3 of the balance sheet.

Among the main reasons for receiving an uncovered loss are:

• obtaining an actual negative financial result from the company’s activities due to the excess of costs over income;
• changes in accounting policies that had an impact on the financial condition of the company (this is directly stated in paragraph 16 of PBU 1/2008, approved by order of the Ministry of Finance of Russia dated October 6, 2008 No. 106n);
• errors found in the current year, made in previous years, which affected the financial result (subclause 1, clause 9 of PBU 22/2010, approved by order of the Ministry of Finance of Russia dated June 28, 2010 No. 63n).

Read more about PBU 1/2008 in the material “ PBU 1/2008 “Accounting policies of the organization” (nuances)” .

How retained earnings from previous years are displayed

Retained earnings from previous years are accumulated in account 84. The balance on the credit of this account is transferred to balance sheet line 1370. Typically, there should be no movement in the debit of the account during the year, since profit distribution traditionally occurs at the end of the year after the annual meeting of the company's owners.

Retained earnings of the reporting year

The credit balance at the end of the year according to accounting account 99 is net profit. When reforming the balance sheet, it is written off to accounting account 84 (Dt 99 Kt 84) and constitutes retained earnings at the end of the reporting year.

In order to separate the indicators of retained earnings of the current (reporting) year from last year’s, some accountants allocate separate lines 1372 and 1372 in the balance sheet, which respectively reflect the retained earnings of the reporting period and previous years.

The use of retained earnings is the prerogative of the company's owners. And highlighting this financial indicator for different years in the balance sheet is primarily convenient for them. But it is worth keeping in mind that the retained earnings of the past year cannot be fully distributed without taking into account the company’s previous operating results.

IMPORTANT!It must not be allowed that the value of the company’s net assets, after transferring retained earnings of the reporting year for the payment of dividends, becomes less than the size of the company’s authorized capital even if there is a reserve fund. The caution applies to cases where uncovered losses were recorded in previous years. The decision to cover last year's losses from retained earnings of the reporting year is made exclusively by the owners of the company.

But retained earnings for previous years can be distributed by the participants/shareholders of the company not only at the end of the year, but at any time. The main thing is to hold a thematic meeting of all company owners and approve the appropriate decision.

Retained earnings: calculation formula

According to general accounting data, retained earnings are a company's net profit after taxes that can be distributed to the company's owners.

Based on global financial practice, retained earnings (hereinafter referred to as RR) are calculated using the following formula:

NPk = NPn + PE - Div,

NPk - NP at the end of the reporting year;

NPn - NP at the beginning of the reporting period;

PE - net profit remaining after accrual of income tax;

Div - dividends paid in the reporting year based on the NP of previous years.

If you do not have the NP value, then to calculate the NP you can use the following scheme:

• first calculate profit before tax (to determine it, calculate operating profit, which is defined as the difference between operating income and operating expenses);
• then subtract depreciation and interest costs from operating profit;
• Subtract tax from the resulting profit value.

Indicators for investors

When analyzing the financial condition of a company, investors pay attention to the use of retained earnings. If NP accumulates and is not put into circulation, this state of affairs should seem to suit investors, since they can count on significant dividends.

However, without investment in its activities, the company stops growing, and its income not only does not increase, but may also decrease (due to a drop in competitiveness, high wear and tear of equipment, and for other reasons related to the lack of investment). So a company that accumulates profits but does not invest in its activities cannot be attractive.

At the same time, a company that does not make a profit and does not pay dividends cannot interest investors at all.

The ideal option for investors is a company that invests the funds remaining after paying dividends in its development. Although the owners may decide not to pay dividends and direct the entire volume of NP into circulation.

Results

There is a separate line in the balance sheet to reflect retained earnings (profit remaining after the amount of income tax or net profit has been withdrawn from it). The figure entered into it corresponds to the amount of the entire net profit accumulated over the years of the company’s activity. During the reporting year, the value of retained earnings in accounting relating to this year can be seen in a separate accounting account. Dividends are paid out of net profit.