Retained earnings is reported on both the balance sheet and the statement of retained earnings. Retained earnings equals your company's net income or loss, minus any stockholder dividends. Because retained earnings is an equity account, it normally has a credit balance. Therefore, you increase the retained earnings balance with a credit and decrease its balance with a debit.
Determine the amount by which retained earnings should be decreased. Unless you are correcting a previous error, retained earnings is normally decreased because your company has a net loss for the reporting period. This loss is shown on your income statement.
Debit retained earnings by reducing the appropriate amount.
Credit the applicable account or accounts so that you have matching credit and debit amounts. Normally, if you have prepared your income statement and are closing your net loss amount to retained earnings, your credit will be entered to the temporary "Income Summary" closing account.
- Do not reduce retained earnings because you pay stockholder dividends. Instead, post these amounts as a debit to "dividends." This amount is then deducted from your retained earnings balance as a separate line item on your balance sheet and statement of retained earnings.
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
- Austin Community College: Statement of Retained Earnings
- Harford Community College: Retained Earnings, Treasury Stock, and the Income Statement
- Austin Community College: Rules of Debits and Credits
- Harper College: Preparing Financial Statements