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Retained Earnings Explained | 5 Mins - YouTube
Channel: Accounting and Tax Academy by Tony D
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if you're operating your business
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through a company retained earnings is a
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key component of your financial
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statement
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and most importantly is one of the key
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indicators of your business's financial
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health
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it is a number that you should
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definitely look at in this video i'm
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going to cover
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where can retained earnings be seen on
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your financial statements what is the
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definition of retained earnings
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and how does it connect the income
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statement and balance sheet
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before i get into today's video be sure
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now let's get started with retained
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earnings
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[Music]
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if you run a limited company business
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then where can you find your retained
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earnings in your financial statements
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it is actually on your balance sheet
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sometimes known as the statement of
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financial position
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under the equity section here in the uk
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this is often known as capital and
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reserves
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and retained earnings can also be known
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as the profit and loss account
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confusing i know welcome to the
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jargon-infested language of accounting
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balance sheet essentially consists of
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three parts that is assets
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liabilities and equity it follows the
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accounting equation
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which is up on the screen the balance
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sheet must do exactly
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what is in its name that is balance and
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retained earnings is just
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one component of the balance sheet
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[Music]
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retained earnings can be defined as the
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accumulated profits that your company
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has earned today
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less any dividends or other
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distributions pay to your shareholders
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retained earnings link the other key
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financial statement that is the income
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statement or profit and loss account
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to the balance sheet so how does it do
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this and how is the retained earnings
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number generated on your balance sheet
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let's use an example to illustrate
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[Music]
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let's suppose you own 100 of the share
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capital of your limited company
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and are a sole director nice and simple
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so far
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in the company year to the 31st of march
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your limited company's income statement
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looked like this income was 150 000
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pounds for the year
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cost of sales were 60 000 pounds for the
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year expenses were 40 000 for the year
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this left a net profit of 50 000 pounds
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before corporation tax is paid
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and corporation tax is applied at the
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current rate thus leaving 40
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500 pounds in profits after tax
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so now you have a choice you can do one
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of three things
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you can withdraw the full forty thousand
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five hundred pounds as a dividend for
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yourself
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the hundred percent shareholder or you
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could decide to retain this forty
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thousand five hundred pounds in the
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company for future use
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whether that be to reuse the money for
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the company or withdraw it at a later
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date
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or you can withdraw part of the money
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and retain the remainder
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let's just assume you decide to retain
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the full 40 500 pounds
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this is then transferred across to your
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company's balance sheet for the period
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ending 31st of march
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so remember your balance sheet comprises
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of assets
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liabilities and equity you have fifty
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thousand and one pounds of assets namely
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cash in your business bank account
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you have nine thousand five hundred
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pounds in liabilities
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that is the corporation tax your company
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owes to hmrc
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that it has not yet paid this gives your
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company net assets of forty thousand
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five hundred and one pounds and because
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the other side of the accounting
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equation is capital and reserves
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you have the starting capital of a
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princely one pound you begin your
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company with
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and retain earnings that transferred
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across from your income statement
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or 40 500 pounds giving your company a
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perfectly balanced forty thousand
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five hundred and one pounds of capital
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and reserves
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this is tony d'angelo for the accounting
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and tax academy
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thanks for watching
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