Retained earnings and shareholder’s equity are both balance sheet items. They are recording in the equity section and the increases are on the credit side which is different from the increasing of assets.
Retained earnings and equity both are not recording in the income statement, but they are presented in the statement of change in equity.
Shareholders’ equity is the residual amount of assets after deducting liabilities. Retained earnings are what the entity keeps from earnings since the beginning. Retained earnings are decreased when the company makes losses or dividends are distributed to the shareholders or owner of the company.
In this article, you will learn the difference between retained earnings and shareholder equity.
Shareholder’s equity referring to the residual amounts that are remaining from entity total assets less total liabilities of an entity at the end of the reporting date. Normally, at the starting date operation of the entity, where there are no liabilities and operation incurred yet, assets are equal to equity or shares capital.
In order words, the money that shareholders inject into the company is both records in the assets and equity the same amounts. You can double-check this with the accounting equation.
The entity then starts the operation, revenue, expenses, and liabilities incurred. Then equity is equal to total assets less total liabilities. Equity at this time might be increased or decrease because of the operating losses or profits. Retained earnings or accumulate losses are normally used to records this in the equity section.
Total shareholders’ equity can be found in two statements such as balance sheet and statement of change in equity. Under the equity section, you can find shareholder’s capital, retained earnings, and other reserves.
Retained earnings on the other hand are the sub-element of shareholders’ equity. As explained above, in the equity section, you can see the invested capital (Shareholders’ capital), retained earnings, reserves, and other adjustments.
Retained earnings are the accumulation of profit that entity made since the starting of business after deducting the dividend payments to the shareholders.
The entity could make dividend payments from its retained earnings only if it reaches the amounts that allowed by law and it is approved by the board of directors.
The entity might choose not to distribute the retained earnings to the shareholders if they need funds to expand its operation.
Is retained earnings equity?
Base on the explanation above, total equity is equal to total assets less total liabilities or total equity is equal to shareholder capital plus total retained earnings or accumulated losses and total reserve.
That mean total retained earnings or accumulated losses are part of total equity. However, it is not part of the share capital or reserve.
Review by Sinra