Adjusting retained earnings is necessary when correcting prior period errors or making adjustments for other reasons such as accounting policy changes or dividends. Here's how you can record various types of retained earnings adjustments:
1. Correction of Prior Period Errors
If there was an error in a prior period's financial statement, you may need to adjust retained earnings. For example, suppose you discovered that an expense of ₹50,000 was not recorded in the previous year.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Retained Earnings A/c | 50,000 | |
| To Expense A/c | 50,000 | ||
| (Being correction of prior period error) | |||
2. Adjusting for Change in Accounting Policy
If there is a change in accounting policy that affects prior periods, an adjustment to retained earnings might be necessary. For example, if a change in depreciation method results in an additional depreciation expense of ₹30,000.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Retained Earnings A/c | 30,000 | |
| To Accumulated Depreciation A/c | 30,000 | ||
| (Being adjustment for change in accounting policy) | |||
3. Recording Dividends
When dividends are declared and paid, it affects retained earnings. For example, if ₹100,000 in dividends is declared and paid.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Retained Earnings A/c | 100,000 | |
| To Cash/Bank A/c | 100,000 | ||
| (Being dividends declared and paid) | |||
4. Adjusting for Unrealized Gains or Losses
Sometimes adjustments for unrealized gains or losses on investments or other comprehensive income might be made to retained earnings. For example, if there is an unrealized loss of ₹20,000 on an investment.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Retained Earnings A/c | 20,000 | |
| To Unrealized Loss on Investment A/c | 20,000 | ||
| (Being adjustment for unrealized loss on investment) | |||
Notes:
- Retained Earnings A/c: This account represents the accumulated net income or loss of the company, adjusted for dividends and other comprehensive income.
- Expense A/c: Represents the specific expense category being adjusted.
- Accumulated Depreciation A/c: Represents the total depreciation expense accumulated over time.
- Cash/Bank A/c: Represents the cash or bank balance of the company.
- Unrealized Loss on Investment A/c: Represents the unrealized loss on investments that affects retained earnings.
Example:
Suppose you discovered an unrecorded expense of ₹10,000 from the previous year, and you need to correct this error in the current period.
Journal Entry for Correction of Prior Period Error:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Retained Earnings A/c | 10,000 | |
| To Expense A/c | 10,000 | ||
| (Being correction of unrecorded expense from prior period) | |||
These entries ensure that retained earnings are accurately reflected in the company’s financial statements, correcting any prior errors or adjusting for new policies or other necessary changes.
