 In this presentation we will take a look at the statement of retained earnings. First definition of retained earnings, total cumulative amount of reported net income less any net losses and dividends since the company started. So remember when we're thinking about retained earnings or when we're thinking about the equity section of the trial balance or financial statements, we're breaking that out a little bit differently than we might for than we will for a partnership or sole proprietor which can be intimidating at first. But just remember that the total equity is the same meaning if we took all this blue section and the dark blue and the light blue here as one number it would be the same kind of concept as for a partnership or sole proprietor. So let's see that by looking at this trial balance. This trial balance is going to be a simplified trial balance to give us an idea of the trial balance and the full balancing of it as we concentrate on the statement of equity. Why are we concentrated on the statement of equity because that's what is different from a sole proprietorship to a partnership so that the balance sheet we're still going to have a balance sheet it's going to be in balance we're still going to have an income statement which is revenue minus expenses what differs now is that the equity section will be broken out in a different type format. So assets earned grand liabilities in orange we've got the equity section in light blue and the income statement which is kind of part of equity in the terms of the accounting equation in dark blue that's why they're both blue here. We've got the debits being non-bracketed or positive and the credits being bracketed or negative for the calculation of debits minus the credits being zero meaning debits do indeed equal the credits. Net income is 425,000 that's not a loss that's income that's the credits of 5,000 revenue minus the debits of 75,000 being that 425,000. So remember that when we think of the total equity as a whole it would be all of this so remember that the equity section if we have not yet closed out revenue and expenses to the equity section then all of this is equity. If we think about the accounting equation we've got assets up here liabilities here and then this whole thing is the equity section and if you think of the equity as a whole it's the same for a partnership sole proprietor or a corporation it's just going to be adding up all of the equity which would be 660,000 plus the 230,000 200 and 30,000 minus the dividends I'm going to break out the dividends separately look at its contra it has a debit balance and the credits are going to win so minus the dividends of 264,000 plus the retained earnings which is a credit of 317,000 plus the revenue 500,000 minus the expenses which are a debit of 75,000 that gives us the 1,368 that's basically the worth of the business the book value of the business or it's the cash the in this case the assets minus the liabilities so that 1,368 can also be cash 1,388 minus the liabilities 20,000 cash being the only asset 1,368 so notice that in total this just represents what is owed to the owner and in a corporation we break that out not by which owner we don't list the partners we don't list who we owe we don't have to do that because all the shares are standardized we just need to list how much is owed to the shareholders what we do is break it out by the investment meaning the common stock and the paid in capital being the investment versus the accumulation of revenue over time which helps us to give the dividends the distributions from the retained earnings portion so when we think about the equity section of the statement of stockholders equity which would be similar to the statement of owners equity or the statement of partners equity for an sole proprietorship or partnership we may need the whole statement of stockholders equity which would represent all of this stuff but what we're really looking for is just the change what happened over time and a lot of times this amount up here the common stock and the paid in capital may not change meaning if we have a corporation that we might have an initial investment just as in a sole proprietor we would put money into it where partnership partners would invest money to the partnership but over time we're hoping that we generate revenue and then we accumulate that revenue and pay that revenue out in the form of dividends for a corporation or draws for a partnership or sole proprietor what we're hoping won't happen over time as we just keep on dumping more money into it so in other words this number shouldn't be we shouldn't be increasing this number all the time hopefully we did that at the beginning and then what's happening we're distributing down here so if that's the case if there's no change up here we don't really need to have a full statement of stockholders equity because these didn't change over time and the statement of stockholders equity is a statement of change we're trying to see what happened from the beginning to the end so what did change is really down here and that's going to be just a statement of retained earnings so just note that the statement of retained earnings is kind of like a shorthand it's just saying hey this is just the change from the retained earnings side of things and it might be most useful if there was no change to the total equity section up here the retained earnings change just like any other type of business would and that it's going to have the beginning balance and the beginning balance for partnership would be the capital account counts or a sole proprietor of the capital accounts and then it's going to go up by net income just like any kind of statement of equity would and then it's going to go down by what was distributed which in the form of a corporation would be dividends if there's a sole proprietor or partnership it would be draws so we're going to concentrate then here so the tricky thing about a corporation is if it just shows the statement of retained earnings we're not representing the full equity section we're only representing the part of the equity section that deals with the accumulation of revenue over the life of the business less what has been distributed in the format of dividends so in in in every other format it's going to be the same as just basically a statement of equity for a sole proprietor it'll start off with the beginning balance the beginning balance of retained earnings is this 317 it is this number now note here that this number on the trial balance is often the most tricky number on the trial balance because the trial balance will be dated as of the end of the year December 31st at 2000 whatever x1 and but note that this is a timing statement this has both the permanent accounts the balance sheet accounts and the temporary accounts and after we close out the temporary accounts they'll close out to the retained earnings so the retained earnings is really on this trial balance even though it's the end of the year December 31st retained earnings the retain the December 31st accounts the retained earnings is really on the books as of the beginning of the year because all of this other stuff will eventually be closed out to it just like the capital account for a sole proprietorship or a partnership also note that the dividends may be posted directly to the retained earnings I'm breaking them out here so that we can see them as we would for a sole proprietor which would be draws dividends representing the amount that the corporation gave back to the owners in the form of distribution of the earnings that have been accumulated over over time so I'm going to break this out notice is a contra account if it were just posted to retained earnings then we'd have to look at the at the general ledger and see what activity there was in retained earnings and just see that the dividends have been taken out and we'd have to start with whatever retained earnings was at the beginning of the year it should match what retained earnings was last year for the last statement note we might put in retained earnings as well the retained earnings for last year ended December 31st 2000 x0 which would be the same as January 1st 2000 x1 the end of last year in other words will be the same as the beginning of this year we don't start at zero as we do with the timing statement for the income statement but we start at where we were at the end of last time that last point in time and then we're going to see what changes in net income is the thing that changes just like any type of statement of equity so proprietor partnership it's going to increase by net income which we can see here as revenue minus expenses it's a credit here because the revenue is a credit expenses are debits that's net income we're not going to put a credit over here we're going to put it on this statement as just a positive number the financial statements represent remember a positive and negative format plus and minus format because most people don't know what debits and credits are it's we can see everything over here with a debit and credit with a lot less bulky type of statement but most people don't know what they are that's why we have to convert it to a plus and minus format so this would just be the same kind of calculation for a sole proprietorship or partnership and then we're going to decrease it by the dividends and that's just the same thing as a sole proprietorship or partnership as well except that for sole proprietorship or partnership it would be called draws it would just be what the partners took out and or the sole proprietor took out in terms of draws the only difference with dividends remember is that the board of directors has to declare the dividends and we don't need to know who got the dividends like we do with a partnership we need to know who got the draws with dividends all shareholders all shares got an equal dividend that's the point so all we need to know is that their dividends were whatever the dividends were that's going to decrease also note that we don't want to I don't have a negative here they might have a negative depending on the format of the financial statement meaning this is going to be the beginning plus net income minus dividends I'm not showing it with a negative because we're showing it with words over here that it's going to be a subtraction problem and then if we do the math where you're going to have the 478 which of course is going to be the 317 plus the 425 minus the dividends of 264 so just remember you have to subtract the dividends common problem common error that comes out to 478 now it's also common to see that 478 and then think that something's wrong because the dividends aren't going to match the assets minus the liabilities this is only showing part of the equity section it's only showing the accumulation of retained earnings retained earnings being the accumulation of net income over the life of the business less how much was given back to the owners from the earnings of the business in the form of dividends over the life what it doesn't include is the amount that has been distributed or given to the company the amount of stock purchased so this is like the investment this is like if we were starting a business and we invested money in that's the money we're just going to leave there we're not going to take it out we're going to try to earn money on top of that the retained earnings and then we're going to get distributed from that dividends from the retained earnings we're making money that's increasing retained earnings when we take money out we're taking it out of with dividends from retained earnings we're not going to touch that initial investment you know unless we have to that's going to be the typical rule so if notice that this is a timing statement starting this is where we started and and then this stuff happened and then we ended up here if if nothing happened to these two accounts then it might be enough just to know what happened to the retained earnings because then we can look back here and say well these two accounts are static they didn't change from the beginning of the year to the end of the year so there's no story to tell it is what it is the story is down here this is what happened we started at retained earnings here went up by net income then we gave out draws that's the story there is no story here it just it is what it is it was the same from the beginning to the end of this particular year