Retained Earnings

All the profits and losses are appropriated at the end of the year. Some of the profits or losses may be carried forward to the next year as Reserve and Surplus to meet contingencies. These are also known as Retained Earnings.

For example, let’s say a company has made the following profits and losses in different years and they decide to carry forward the profits to meet unforeseen liabilities/losses:

Year 1 : Loss (Rs. 5,000)
Year 2 : Profit (Rs. 3,000)
Year 3 : Profit (Rs. 10,000)

The Retained Earnings account balance = Rs (3000 + 10000 - 5000) = Rs. 8,000