Without retained earnings, it will be difficult for an enterprise to assess the degree of profitability and, as a result, to make timely adjustments to the production process and sales of products. Therefore, this type of reporting should always receive the necessary share of attention.
The concept of retained earnings
In most cases, enterprises use several sources to generate income. The result of all this total activity is the profit, which can be defined as the balance sheet.
If you use a more comprehensive definition, then we can say that the balance sheet profit is the total, total income or loss of the company, which is a consequence of the sale of products and services, as well as those financial receipts that were received from trading operations that are not related to key activities. In this case, all data is recorded in the external financial statements.
As for the value of this indicator, it largely depends on the accounting policy chosen by the enterprise management. Those regulatory documents that companies use give them the opportunity to independently determine how the financial result will be formed and what impact it will have in the near future. To implement the selected method of displaying retained earnings, various accounting methods are used.
In fact, this type of reporting is the final result of accounting, during which all balance sheet items were evaluated. Such an indicator can be formed at the end of a year, quarter or month.
How is the analysis
The first stage of the analysis of retained earnings comes down to assessing the actual implementation of the plan. In this case, a comparison is made with the reporting period that was earlier.
The assessment itself is divided into general and composite. It is in the composite that the analysis of the parts that make up the indicator is made. Moreover, attention is paid to each element.
The balance sheet profit analysis is used to perform certain tasks:
- identification of unprofitable links and those aspects of economic activity that are weak;
- identification of factors and reasons that caused the failure to fulfill the plan of total income;
- compiling lists of available reserves in order to reduce losses and further increase financial income;
- fixing processes that caused losses.
The analysis process involves the study of the structure of retained earnings, as well as its composition, as well as the dynamics of the implementation of the established plan during the reporting year.
Touching upon the topic of studying indicators in dynamics, it is worth noting that inflationary factors that have a tangible effect on it (dynamics) are taken into account. At the same time, revenue is adjusted for the weighted average price growth index within the industry. With regard to the cost of goods that were sold, as well as work and services, in most cases they are reduced by the difference in the funds involved and consumed in production within the period taken into account during the analysis.
This is what the structure of retained earnings implies.
The components of this type of reporting
The composition of this indicator is as follows:
- profit and loss resulting from the sale of goods, work and services;
- financial gains or losses from other types of sales;
- income received from non-operating operations.
Thus, the balance sheet profit in the balance sheet has the form of the final financial result.
A key element of this indicator is loss. In most cases, its share in the balance sheet surpasses the level of 85%. The formation of this type of reporting is directly related to the characteristics of economic activity.
An example is the activity of enterprises that sell services or supply. In accounting for such companies, revenue is equated to income received from sales. It is calculated as the difference between the sale and purchase value of goods that have already been sold.
It is worth noting the fact that construction companies, for example, have the right to reflect revenue only after documents are signed confirming the fact that the customer accepts the work performed.
Retained earnings: formula
In order to calculate this indicator, you must use the following formula: BP = PRP + PPR + air defense.
BP is the balance sheet profit. Under the PRP is understood as income from sales of products, PPR is used to denote the finances received from other sales. Air defense, in turn, means profit from non-operating operations.
At the same time, the profit received from sales implies the difference between the income and the cost of the activity that was directed to the production of products.
Profitability
Such an indicator as the profitability of retained earnings is the most common. This ratio is needed in order to display the number of monetary units that were attracted by the company to receive one ruble. Moreover, the source of fundraising is not taken into account.
To fulfill the value of the indicator, the pressure of retained earnings is calculated on the average value of all assets within a specific period.
If we compare this coefficient with the profitability indicator of all assets, then we can determine the impact on the profitability of various payments from the received funds and tax deductions.
Display Features
Speaking about this indicator, it is worth paying attention to the fact how the retained earnings are recorded. A line in the balance sheet is allocated for each element of profit of this type.
It is worth remembering that the report, which displays losses and received funds, consists of 4 sections.
- Income and expenses from ordinary activities.
- Other income and expenses.
- Profit or loss before tax.
- Net cash inflow or loss for the reporting year.
This is essentially the balance sheet profit. The line in the balance sheet under the number 050 serves just to fix the final financial result from the activities of the company.
Profit from sales
In order to better understand the essence and purpose of this indicator in the balance, you need to pay attention to the structure of the elements from which it is formed.
Having dealt with this topic, you can competently control the process of generating income and increase the profitability of capital and various funds of the enterprise.
The first is to consider the profit from the sale of products. This is the difference between the income that was received in the process of selling the manufactured goods and the costs arising from the release and sale of the product.
The bulk of the company's income is the result of the sale of manufactured goods or provided services. A logical conclusion follows from this: the higher the level of sales, the more profit the company will receive.
The following factors may affect the amount of income:
- The volume of products that are sold.
- Change in the cost of goods. It should be understood that lower cost allows you to make the product significantly more affordable, and, therefore, significantly increase sales. The consequence of this process is the growth of company profits.
- Change in the quantity of products that are produced. This relationship is obviously logical.If the company begins to produce less and, consequently, sell, then the level of profit also decreases. Accordingly, the better the scale of production, the greater the amount of incoming financial resources.
Implementation of fixed assets
Carrying profit includes information relating to this process. In this case, we are talking about the difference between the sale price of funds, their initial cost, which increases by inflation.
At this residual value, you can determine the depreciation of property:
- fixed assets;
- intangible assets;
- low value property.
Speaking about the group of fixed assets as a whole, it is worth understanding what components are included in its structure:
- funds that do not participate in production, but at the same time ensure the operation of the enterprise;
- involved in the production process.
At the same time, fixed assets can be either active (have a direct impact on the subject of labor) or passive (oriented towards ensuring stable working conditions).
Attention should be paid to income from non-operating transactions, from which such an indicator as retained earnings is also formed. The formula for compiling these statements inevitably includes this type of receipt of funds (non-operating), to which the following processes are relevant:
- income received from other enterprises;
- renting out company property;
- various sanctions;
- investing for profit.
Summary
The use of retained earnings is a prerequisite for the successful and stable operation of the enterprise. Using this indicator, you can evaluate both the economic and production side of the development of the company. This allows you to always have an understanding of the real level of return on assets and production assets.
