Retained Earnings Journal Entry Example
Retained earnings represent the cumulative amount of net income that a company has retained, rather than distributed as dividends. They are part of shareholders' equity and can be used for reinvestment in the business, paying off debt, or other purposes.
Scenario:
A company has the following transactions affecting retained earnings:
- Net income for the year: ₹150,000
- Dividends declared and paid: ₹50,000
- Transfer to general reserve: ₹20,000
1. Closing Net Income to Retained Earnings
At the end of the financial year, the net income is transferred to retained earnings.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-03-31 | Income Summary A/c | 150,000 | |
| To Retained Earnings A/c | 150,000 | ||
| (Being net income transferred to retained earnings) |
Explanation:
- Income Summary A/c is debited to close out the income summary account.
- Retained Earnings A/c is credited to increase retained earnings by the net income amount.
2. Declaring and Paying Dividends
When dividends are declared and paid, they reduce retained earnings.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-04-15 | Retained Earnings A/c | 50,000 | |
| To Dividends Payable A/c | 50,000 | ||
| (Being dividends declared) |
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-04-20 | Dividends Payable A/c | 50,000 | |
| To Cash/Bank A/c | 50,000 | ||
| (Being dividends paid) |
Explanation:
- Retained Earnings A/c is debited to reduce retained earnings by the dividend amount.
- Dividends Payable A/c is credited to recognize the liability.
- Dividends Payable A/c is debited to remove the liability once paid.
- Cash/Bank A/c is credited to reflect the outflow of cash.
3. Transferring to General Reserve
Some companies may transfer a portion of retained earnings to a general reserve.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-04-30 | Retained Earnings A/c | 20,000 | |
| To General Reserve A/c | 20,000 | ||
| (Being transfer to general reserve) |
Explanation:
- Retained Earnings A/c is debited to reduce retained earnings by the transfer amount.
- General Reserve A/c is credited to increase the general reserve.
Summary of Retained Earnings Changes
After the above transactions, the changes in retained earnings are:
- Initial Retained Earnings: ₹0 (Assuming no prior balance)
- Add: Net Income: ₹150,000
- Less: Dividends: ₹50,000
- Less: Transfer to General Reserve: ₹20,000
- Final Retained Earnings: ₹80,000
