HomeProductsAccountingRetained Earnings: How to Calculate and Make a Report

Retained Earnings: How to Calculate and Make a Report

Aside from capital, profits are one of the most critical factors affecting a business’s ability to continue operating and generating profits. There are several profit models, such as gross profit or pre-tax profit. In addition, there are also known as retained earnings.

Retained earnings are a share of a company’s net income that is not paid as dividends. Thus, retained earnings are the remaining net income after dividends.

The retained earnings are contained in the company’s financial statements, especially in the income and loss post. Calculating the profit portion is by dividing the profits into share ownership (dividends) and profits saved for reinvestment.

Retained Earning: What You Should Know

Retained earnings are part of the net income that is retained. The company does not pay dividends to investors as a precautionary fund, extra reserve capital, or to meet investment needs. Retained earnings are also referred to as retained earnings.

In short, retained earnings can also have the meaning of residual net income reduced in dividends. Dividends are the distribution of profits by a business to its shareholders proportional to their shareholding.

This retained earnings decision occurred on a joint decision at the General Meeting of Shareholders (GMS). The company’s financial situation is a reference for decision-making, marketing strategies, and future operational funding requirements.

Changes in corporate taxes, production costs, sales costs, and the cost of goods, changes in net income, changes in the number of dividends a company has to pay to shareholders, and changes in administrative costs impact profitability.

Function of Retained Earnings

Retained earnings are not without cause and purpose. There is a particular urgency that makes all shareholders agree not to give the company dividend rights. Here are its functions and objectives:

Assist with debt servicing for businesses

If the business does have significant debt, investing the retained profit is hugely profitable. Because the business’s accountant can make debt payments on time by utilizing the remaining profits, repaying its obligations will not affect the company’s other funding sources, ensuring the security of the company’s primary funds.

For the operation of the business’s financing

A business must have an adequate supply of cash, both large and small. The company can use retained earnings to fund operations, allowing it to continue operating in the hope of expanding.

This is frequently the case when a business’s profits are small and would be much better spent financing operations than distributed to shareholders. However, it requires shareholder approval.

In the capacity of reserve capital

Additionally, profit funds serve as capital reserves if the business encounters financial difficulties. Reserve funds are used to supplement existing funds for companies to continue operating effectively without borrowing money from third parties such as banks.

For business development

Additionally, it serves as a source of reserve funds for the company’s finances during financial distress. Profit holding of its use can also serve as a form of business development capital. This business development does not have to be limited to building construction; it can also include human resources to the company.

Also Read: Discover 10 Effective Business Expansion Strategies

The company’s future investment capital

Of course, business owners want a business that is not static or declining but wants growth and innovation to survive and thrive. Another profit-holding advantage is to expand the business or make an investment.

Factors That Cause Profit to be Restrained

Several factors contribute to the occurrence of restrained profits, including the following:

There is a change in the company’s management

If the company’s control or management changes, existing profits are usually maintained. This is done to allow the new management to adjust and demonstrate the credibility of its financial management. Gains are born in these cases to ensure job stability, suppress acts of suspicion or fraud, and so on.

Utilize HashMicro ERP Software to simplify enterprise management. ERP (Enterprise Resource Planning) software can help your business improve its overall control and visibility. Profit maximization and financial control are more practical and automatic.

There was an error in the previous period’s financial statements

Another factor is the occurrence of errors in the financial statements of the previous period. In this case, the company must first improve the financial statements so that they are valid, after which only take into account the value of the earnings statement adequately held.

There is an adjustment in the value of rupiah from the previous period

The adjustment of the rupiah value is also an influential factor. The rupiah exchange rate can fluctuate at any time, affecting the company’s profit calculation results. Thus, accountants choose to maintain existing profits.

Changes in the calculation method

The change in the calculation method can also contribute to retained earnings. For example, if the previous calculation method is always every month and then switches to weekly, it won’t be evident. Accountants will usually withhold existing capital gains due to ambiguous data.

Changes in accounting principles from the previous period

In addition, changes in accounting principles from the prior period may affect the value of retained earnings statements. For example, when the business begins to adopt sharia accounting in the next period, bookkeeping and results must apply Sharia law.

How to calculate retained earning

How to Calculate and Make a Retained Earnings Report

Retained earnings become one of the essential financial statements for the company and need to be compiled regularly. The ability of a business to operate effectively and achieve its business objectives depends on the quality of these reports.

As a result, you must first understand how retained earnings are calculated, namely as follows:

Step 1: Calculate gross profit

The calculation of the first component is the gross profit or profit that the business earns from sales, namely as follows:

GROSS PROFIT = SALES FIGURE – COST OF GOODS

Step 2: Calculate operating profit

If you have earned the amount of gross profit, the next is to calculate the company’s operating profit using the following formula:

OPERATING PROFIT = GROSS PROFIT – OPERATING EXPENSES

Step 3: Calculate net income before tax

The next step in determining retained earnings is determining net income before taxes. These calculations are by subtracting interest, amortization, and depreciation of operating profit.

NET INCOME BEFORE TAX = OPERATING INCOME – (INTEREST+ AMORTIZATION+DEPRECIATION)

Step 4: Calculating taxable net income

How to calculate net income after tax you can use the following formula:

NET INCOME AFTER TAX = NET INCOME BEFORE TAX – TAX RATE

Step 5: Calculate retained earnings

Once you know the company’s net income in a certain period, you can calculate how much retained profit the company can make, namely:

RETAINED EARNINGS = NET INCOME AFTER TAX – DIVIDENDS

Also Read: Importance of DuPont Analysis for Corporate Financial Management

Conclusion

Calculating retained earnings manually will take time and effort. There is a possibility of incorrect numbers due to human error; however, you can minimize or eliminate such errors by utilizing Accounting Software.

If you want to switch financial records automatically, you can use the best Accounting Software from HashMicro. Using an accounting system through software will make it easier for you to produce accurate financial statements and display the actual conditions.

Starting from cash flow management, calculating retained profits, making financial statements, bank reconciliation, adjustment journals, invoice creation, and others, making reports more effortless and automatic. We have provided practical solutions for hundreds of large companies in Indonesia and Singapore. Change to HashMicro, now.

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Fadel Rasyidhttps://www.fadelrasyid.site
I see myself as an active and curious person. Constantly open to learning and growing with values. I never can't see the bright side of a situation — a content writer at HashMicro & a digital marketing enthusiast.

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