Retained Earnings, Annual Net Income, and Appropriations

Retained Earnings, Annual Net Income, and Appropriations

Retained earnings are not stored physically in the database in the financial statements of each individual company, but are calculated as needed – the FI application, for instance, does not store any direct postings or G/L account balances for retained earnings. Retained earnings are assessed by calculating

the balance of all asset and liability items and

the balance of all revenue and expense items plus appropriation of retained earnings.

The Consolidation system deviates from this scheme. The value of retained earnings must be entered into the Consolidation system. There, entries that affect retained earnings are posted. On the one hand, currency translation and consolidation entries can adjust retained earnings; on the other hand, consolidation of investments eliminates retained earnings. Because the system is designed for automatic postings, you cannot directly post to retained earnings.

Net income is always adjusted when entries are posted between income statement accounts and balance sheet accounts, which leads to an imbalance in the respective statements. The system computes this adjustment to net income and automatically posts a balancing entry. The system requires the specification of selected FS items onto which the adjustment is to be posted, in order to be able to automatically post the balancing entry.

You must distinguish between the following constellations of consolidated statements:

Disclosure of the appropriation of retained earnings following the income statement:

In this case, selected FS items are defined for retained earnings on the balance sheet (BG) as well as net profit/loss on the income statement (ERG). These items are adjusted by the affects on net income.

Disclosure of the appropriation of retained earnings on the balance sheet:

In this case, selected FS items are defined for the annual retained earnings on the balance sheet (BG) as well as the annual net income on the income statement (ERG). These items are adjusted for the affects on net income. The retained earnings are disclosed on the balance sheet as a totals item by totaling the annual net income and the appropriation of retained earnings.

Please note: Retained earnings (and annual net income) in the income statement has an opposite +/- sign to retained earnings in the balance sheet. The entry to selected item ERG is essentially a transfer of the balances of all income statement items (including appropriation of retained earnings where this is reported in the income statement). This entry results in a zero balance in the balance sheet and income statement.

The following illustrations show how retained earnings and annual net income are handled, depending on the type of appropriation used: