Retained Earnings
What are Retained Earnings?
Retained earnings is an equity account, showing accumulated profits since business inception, less any dividends paid.
![re1](https://seeaccountingnow.online/wp-content/uploads/2021/08/re1.jpg)
How it Works
During an accounting period, a business will earn income.
![re2](https://seeaccountingnow.online/wp-content/uploads/2021/08/re2.jpg)
It will also incur expenses.
![re3](https://seeaccountingnow.online/wp-content/uploads/2021/08/re3.jpg)
Providing income is greater than expenses, it will make a profit.
![re4](https://seeaccountingnow.online/wp-content/uploads/2021/08/re4.jpg)
The profit is recorded in the profit and loss account.
![re5.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/re5.1.jpg)
Then it is shown in your period end reports.
![re6.1](https://seeaccountingnow.online/wp-content/uploads/2021/08/re6.1.jpg)
After that, it is transferred to the retained earnings account.
![re7](https://seeaccountingnow.online/wp-content/uploads/2021/08/re7.jpg)
The retained earnings account is an equity account.
![re8](https://seeaccountingnow.online/wp-content/uploads/2021/08/re8.jpg)
Equity accounts show how much money the business owes to the owner.
![re9](https://seeaccountingnow.online/wp-content/uploads/2021/08/re9.jpg)
By crediting the retained earnings account, you will increase the account’s balance
![re10](https://seeaccountingnow.online/wp-content/uploads/2021/08/re10.jpg)
This shows the owner is owed the current profit, as well.
![re11](https://seeaccountingnow.online/wp-content/uploads/2021/08/re11.jpg)
The actual retained earnings will be contained in asset accounts.
![re12](https://seeaccountingnow.online/wp-content/uploads/2021/08/re12.jpg)
For example, retained earnings may form part of the business’s cash holdings.
![re13](https://seeaccountingnow.online/wp-content/uploads/2021/08/re13.jpg)
Or it could form part of accounts receivable or stock.
![re14](https://seeaccountingnow.online/wp-content/uploads/2021/08/re14.jpg)
As such, the accounts need to show that some of the value held in asset accounts came from retained earnings.
![re15](https://seeaccountingnow.online/wp-content/uploads/2021/08/re15.jpg)
To do this, you use a credit entry.
![re16](https://seeaccountingnow.online/wp-content/uploads/2021/08/re16.jpg)
This shows money has come from retained earnings.
![re17](https://seeaccountingnow.online/wp-content/uploads/2021/08/re17.jpg)