Retained Earnings Account

Definition

• A crucial part of financial accounting is the retained earnings account, which shows the total profits or losses that a business has held onto rather than paying out as dividends over the course of previous years.

• Retained earnings are either utilized to pay off debts or are reinvested in the company.

• Profits are moved to the general reserve account.

• Funding internally or reinvesting earnings

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Configuration in SAP

During the initial construction of the chart of accounts, the retained earnings account is defined. At the close of the fiscal year, SAP automatically moves the balance of every P&L account to this account.

Transaction Code: OB53

• The transaction code OB53 is used in SAP to configure the retained earnings account. This is where the system's retained earnings account is defined.

Assign Retained Earnings Account:

• A retained earnings account needs to be connected to each P&L account in the system.

• The system automatically links profit and loss G/L accounts to the retained earnings account when you create them, making sure that the year-end closing balances are transferred.

Procedure:

• Access the SAP Easy Access Menu by going to OB53 or by using the T-code directly.

• To configure the retained earnings account, enter the Chart of Accounts for that account.

• Assign the Retained Earnings Account and define a specific P&L Statement Account Type.

Example 1: General Case of Retained Earnings Account

• Company: ABC Manufacturing Ltd.

• Fiscal Year: 2023

• Retained Earnings G/L Account: 300100

Scenario:

• At the end of 2023, the company will have had a net profit of ₹200,000 from a total revenue of ₹1,000,000 and expenses of ₹800,000.

• The company transfers the net profit of ₹200,000 to the Retained Earnings Account (300100) and closes its Profit & Loss (P&L) accounts.

Journal Entry at Year-End Closing:

• Debit: ₹1,000,000 (Revenue), ₹800,000 (Expenses) → All P&L accounts (Expenses, Revenue, etc.)
• Credit: Net Profit (₹200,000) → Retained Earnings Account (300100)

₹200,000 is currently in the retained earnings account and will be carried over to the following fiscal year as equity for the business.