Retained Earnings at the end of a period: Is equal to the balance in the Retained Earnings account in the adjusted trial balance at the end of a period. Is determined in the Statement of Retained Earnings. Is equal to Retained Earnings at the beginning of the period, minus net income (or plus net loss) for the period. Appears in the Income Statement for the period.
The correct answer and explanation is :
The correct answer is: Is determined in the Statement of Retained Earnings.
Explanation:
Retained earnings refer to the cumulative amount of net income a company has retained, rather than distributed to shareholders as dividends. It is a key component of shareholders’ equity on the balance sheet. The retained earnings at the end of a period represent the cumulative amount of profits or losses that have been retained in the company over time, rather than paid out as dividends.
The process of determining retained earnings begins with the Statement of Retained Earnings, which summarizes the changes in retained earnings during a specific accounting period. This statement takes into account the following components:
- Retained Earnings at the beginning of the period: This is the balance carried over from the previous period, often referred to as the “beginning balance.”
- Net Income (or Net Loss) for the period: The net income (or loss) for the period, which is derived from the income statement, is added to (or subtracted from) the beginning retained earnings balance. If the company had a net income, the retained earnings will increase. If there was a net loss, the retained earnings will decrease.
- Dividends declared: Any dividends that are declared and paid out to shareholders during the period are subtracted from the retained earnings. This reflects the portion of profits that are distributed rather than retained in the business.
At the end of the period, after accounting for net income (or loss) and dividends, the adjusted retained earnings balance is reported on the balance sheet. This balance is carried over as the “retained earnings” account for the start of the next period.
Key Points:
- The retained earnings balance does not appear directly in the income statement. Instead, the income statement provides the net income or loss, which then impacts the retained earnings via the Statement of Retained Earnings.
- Retained earnings at the end of the period are not simply the beginning balance minus net income or plus net loss, as this doesn’t account for dividends, which are also crucial to the calculation.