Retained Earnings
Definition: Accumulated undistributed net income
Scope:BroadDifficulty:Easy
Part of: Retained Earnings
Accumulated undistributed net income
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Close net income | ||
| Year-end: net income $50,000. | ||
| Income Summary | $50,000 | |
| Retained EarningsEquity+ | $50,000 | |
| Profit increases retained earnings. | ||
| 2. Declare cash dividend | ||
| Board declares $25,000 dividend. | ||
| Retained EarningsEquity− | $25,000 | |
| Dividends PayableLiability+ | $25,000 | |
| Retained earnings decrease; liability created. | ||
| 3. Prior-period adjustment | ||
| Correct a $3,000 error from prior year. | ||
| Retained EarningsEquity− | $3,000 | |
| InventoryAsset− | $3,000 | |
| Restated directly to retained earnings, not current income. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Income SummaryIncome SummaryAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$50,000.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$50,000.00
Retained EarningsRetained EarningsEquityThe owner’s residual interest in the business. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$25,000.00
$3,000.00
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$50,000.00
Normal bal. ▶
$22,000.00
Dividends PayableDividends PayableLiabilityAn obligation the business owes to others. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$25,000.00
Normal bal. ▶
$25,000.00
InventoryInventoryAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$3,000.00
$3,000.00
DurationLong-Term
Related Reports
- Balance Sheet(Primary — Equity)
- Statement of Stockholders' Equity (Report)(Primary — Rollforward)
Related Subjects
Components
- Accumulated DeficitSub-topic
- Cash DividendsSub-topic
- Stock DividendsSub-topic
See Also
- Income SummaryPaired in entry: Close income summary (net income)
- Dividends DeclaredPaired in entry: Close dividends declared
External Links
- Retained earnings — Wikipedia