![]() The equation which underlies retained earnings may be represented as:Įnding retained earnings = Beginning retained earnings + Net income – DividendsĮnding retained earnings = Beginning retained earnings + Revenues – Expenses – Dividends It has a balance at both the beginning and end of the accounting period, with the difference being due to activities which occur during the accounting period. ![]() Retained earnings represent the earnings or net income of a company that is retained and not distributed as dividends. The balance sheet and income statement are connected through the retained earnings component of owners’ equity. The equation that is associated with the income statement is: ![]() The income statement tells the story of a company’s performance over a specified period of time. Owners’ equity = Contributed capital + Retained earnings Income Statement This can be expressed by the following equation: the capital that has been contributed by the owners of the company as well as the earnings that have been retained in the company up to a specified point in time. Owners’ equity can also be classified according to its origin i.e. This indicates that owners’ equity represents the residual claim on a company’s assets after its liabilities have been deducted. If we make owners’ equity the subject of the equation, we see that: The basic accounting equation tells us that the claims on a company’s assets are derived from its liabilities and owners’ equity. The equation which underlies the balance sheet is referred to as the “basic accounting equation”, and can be represented as follows: Assets = Liabilities + Owners’ equity The balance sheet provides a snapshot of a company’s financial position at a specific point in time. Balance Sheet and the Basic Accounting Equation The balance sheet and income statement are two of the most popular financial statements that are prepared by a company. Financial statement elements (assets, liabilities, owners’ equity, revenue and expenses) are used as the inputs for the equations which feed into the preparation of a company’s financial statements.
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