Retained earnings is a component of owner's equity that represents the net income of a business that has been reinvested in the business. By understanding the basic transactions involved and using Bkper correctly, you can effectively track net income over time as it is recorded as retained earnings on the balance sheet.
Create the Retained Earnings Account
Account Type: Retained earnings is an equity account, which in Bkper is represented by a liability Type account (colored yellow).
Group: Group this account within the "Owners Equity" group.
Understanding the accounting
After an operating period, the financial result can be either positive (profit) or negative (loss). This result is reflected on the balance sheet as assets ≠ liabilities + owner's equity. The exact difference between assets and liabilities + owner's equity represents the net income.
Transition the Result to the Balance Sheet
Moving this periodic result from the income statement to the balance sheet via the retained earnings account balances out the difference between debits and credits on the balance sheet, ensuring the equation remains Assets = Liabilities + Owner's Equity.
Profits Increase Owner's Equity: Profits are credited to the retained earnings account, leading to an increase in owner's equity.
Losses Decrease Owner's Equity: Losses are debited from the retained earnings account, reducing owner's equity.
Sample Transactions
An operational period with a Profit increases Owner's Equity
- Debit: Income summary
- Credit: Retained Earnings
An operational period with a Loss, decreases Owner's Equity
- Debit: Retained Earnings
- Credit: Income summary
Additional Insights
- When dealing with income summary transactions, you can choose either incoming or outgoing type accounts. For clarity, consider booking income summary profits on incoming type accounts (colored green) and income summary losses on outgoing type accounts (colored red).
- The income summary account can be omitted from the income hierarchy, as it would zero out the actual result of the income hierarchy.
- Locate the income summary account in the lower section of incoming and outgoing type accounts (non-permanent debit and credit accounts). Consider grouping the summary accounts into one hidden group to keep the left menu organized and clean.