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Reserves and surplus At the end of an accounting period the company may decide to transfer part of the profits to a reserve and retain the balance in the profit and loss account. The reserve created out of profits transferred from profit and loss account is called general reserve. The balance in the profit and loss account is called a surplus and will be shown under this head in the balance sheet.
The company can use the general reserve for various purposes including issue of bonus shares to shareholders and payment of dividend when profits are insufficient.
The premium received when shares are issued at a premium to the face value is shown under the head reserves and surplus.
Retained Earnings
When a company generates a profit, management has one of two choices: they can either pay it out to shareholders as a cash dividend, or retain the earnings and reinvest them in the business.
When the executives decide that earnings should be retained, they have to account for them on the balance sheet under Shareholder Equity. This allows investors to see how much money has been put into the business over the years. Once you learn to read the income statement, you can use the retained earnings figure to make a decision on how wisely management is deploying and investing the shareholder's money. If you notice a company is plowing all of its earnings back into itself and isn't experiencing exceptionally high growth, you can be sure that the stock holders would be better served if the board of directors declared a dividend.
Ultimately, the goal for any successful management is to create $1 in market value for every $1 of retained earnings.
Let's look at an example:
·Microsoft has retained $18.9 billion in earning over the years. It has over 2.5 times that amount in stockholder equity ($47.29 billion), no debt, and earned over 12.57% on its equity last year. Obviously, the company is using the shareholder's money very effectively. With a market cap of $314 billion, the software giant has done an amazing job.
·Lear Corporation is a company that creates automotive interiors and electrical components for everyone from General Motors to BWM. As of 2001, the company had retained over $1 billion in earnings and had a negative tangible asset value of $1.67 billion dollars! It had a return on equity of 2.16%, which is less than a passbook savings account. The company is astronomically priced at 79.01 times earnings and has a market cap of $2.67 billion. In other words: Shareholders have reinvested a billion dollars of their money back into the company and what have they gotten? They owe $1.67 billion.1 That is a bad investment.
The Lear example deserves a closer look. It is immediately apparent that shareholders would have been better off had the company paid out its earnings as dividends. Unfortunately, the economics of the company are so bad had the profits been paid out, the business probably would have gone bankrupt. The earnings are reinvested at a sub par rate of return. An investor would earn more on the earnings by putting them in a CD or Money Market fund then by reinvesting them into the business.
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What is the meaning of reserves and surplus?
Amount appropriated out of earned surplus (retained earnings) for future planned or unforeseen expenditure.
How do you figure out retained earnings?
by balance sheet under reserves and surplus heading otherwise in profit and loss appropriation a/c
What is the difference between retained earnings and reserve?
Retained earnings are current year profit and Reserves are allotted the amount from last year profits as reserves.
Are retained earnings and reserves the same thing?
YES RETAINED EARINING ARE ADDED TO THE EXISTING RESERVE OF THE COMPANY
What does accumulated earnings mean?
The definition of accumulated earnings is the sum of the profits of a company after dividend payments since the inception of the company. Accumulated earnings are also called earned surplus, retained earnings, or retained capital.
What is the difference between retained earnings and retained profit?
Retained profits are profits of that particular financial year (After taken into account of dividends payouts, transfer to reserves and etc) without adding profits from the previous year. When Retained profit of the current year is transferred to the balance sheet after adding previous year profits, it is called retained earnings.(Retained profit + Retained earnings b/d = Retained earnings c/d).
Does share capital change when bonus share issued?
When bonus shares are issued share capital also change as amount from retained earnings or reserves is utilized to issue bonus shares and it increase the share capital while decrease the reserves or retained earnings.
Is reserves similar or different from retained profit?
Reserves are similar in this sence that these are also created from net income and retained earnings are as well but the difference is that both are created and limited for different uses in business.
What does the statement of changes in retained earnings consist of?
The statement of changes in retained earnings, also known as the statement of earned surplus, is documentation that only details the changes in earned capital: the net income and the dividends for a given period.
How do you label negative retained earnings on a balance sheet?
The term "Retained Earnings" is generally used to describe that portion of stockholders equity derived from profits. (An older term, no longer generally in use, is "Earned Surplus".) Retained earnings represents the accumulation of earnings less dividends since the beginning of the company or accounting entity. In successful companies the retained earnings account normally has a positive balance; but if total losses should exceed total net income it is possible that the retained earnings account could have a negative balance. This is generally known as a "DEFICIT", in answer to the question.
What is the name given to excess profits that are reinvested back into a business?
The term that you are looking for is 'retained earnings'. These are excess profits that may or may not be reinvested back into a business. They are ususally based on a percent of net earnings that are not paid out as dividends. Retained earnings are also used to pay debt and are recorded on the balance sheet under Shareholders' Equity.Also referred to as 'retained surplus' or 'undistributed profits', retained earnings are derived by adding net income to or subtracting net losses from beginning retained earnings less dividends paid to shareholders.
Is unappropriated retained earnings credit?
Yes, since this account (Retained Earnings) is a credit account and an uppropriate retained earnings account is simply a non-restricted account which is Retained Earnings !!! Even the restricted/ appropriate retained earnings are credited.
