Statement of Income and Retained Earnings

Statement of Income and Retained Earnings

The Statement of Income and Retained Earnings is an essential financial document used under the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102, Section 6). This statement is a simplified alternative to the statement of changes in equity and is typically employed when the only alterations to the equity of a company during a period stem from profit or loss, dividend distributions, prior-period adjustments, and changes in accounting policy.

Detailed Definition

The statement of income and retained earnings integrates the traditional income statement and the statement of retained earnings into one condensed report. This fusion offers a comprehensive view of a company’s financial performance and the resultant changes in retained earnings for the period.

Under FRS 102, Section 6, the statement includes:

• Net Profit or Loss: The total profit or loss for the period.
• Dividends Paid: Dividends distributed to shareholders during the period.
• Prior-Period Adjustments: Adjustments made to correct errors or reflect changes in accounting policy for previous periods that affect the opening balances of retained earnings.
• Changes in Accounting Policy: Adjustments resulting from the adoption of new accounting policies that impact the retained earnings.

Examples

1. Profit and Dividend Distribution (Small Company)

   • Net Profit: £50,000
   • Dividends Paid: £10,000
   • Adjustment for Prior Period: £5,000 adjustment to increase retained earnings

   Calculation: Starting Retained Earnings: £0

   • Net Profit: +£50,000
   • Dividends Paid: -£10,000
   • Prior-Period Adjustment: +£5,000

   Ending Retained Earnings: £45,000

2. Change in Accounting Policy (Medium Company)

   • Initial Retained Earnings: £100,000
   • Net Profit: £200,000
   • Dividends Paid: £50,000
   • Change in Accounting Policy: Results in a £20,000 reduction in retained earnings

   Calculation: Starting Retained Earnings: £100,000

   • Net Profit: +£200,000
   • Dividends Paid: -£50,000
   • Change in Accounting Policy: -£20,000

   Ending Retained Earnings: £230,000

Frequently Asked Questions

Q1: Why would a company use a statement of income and retained earnings instead of a full statement of changes in equity?

• A: A company may use this simplified statement when the only changes to equity for the period arise from profit or loss, dividends paid, prior-period adjustments, and changes in accounting policies. This approach streamlines reporting requirements and makes financial statements more accessible.

Q2: What is the primary benefit of using the statement of income and retained earnings?

• A: The primary benefit is its simplicity and comprehensiveness. It combines critical elements of performance and equity changes, providing an integrated view of financial health without the need for a more detailed statement of changes in equity.

Q3: How are prior-period adjustments reflected in the statement?

• A: Prior-period adjustments are applied directly to the opening balance of retained earnings. This ensures that retained earnings accurately reflect corrections for errors or changes in accounting policies from previous periods.

Q4: What specific standards govern the structure and content of this statement?

• A: The structure and content are governed by the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102), specifically Section 6.

Q5: Can a company with significant equity transactions outside profit, dividends, and accounting changes use this statement?

• A: No, companies with more complex equity transactions should provide a full statement of changes in equity to capture all movements comprehensively.

Related Terms

• Financial Reporting Standard (FRS) 102: A set of accounting standards providing guidelines for financial statements preparation for entities in the UK and the Republic of Ireland.
• Statement of Changes in Equity: A financial statement that outlines the changes in equity over a period, covering items like profits, losses, dividend payments, and share transactions.
• Prior-Period Adjustments: Corrections made in financial statements for errors or changes in accounting policies from previous periods, affecting the current period’s opening balances.

Online Resources

• Financial Reporting Council: Source for in-depth resources on FRS 102 and other UK financial reporting standards.
• The Institute of Chartered Accountants in England and Wales (ICAEW): Offers guidance and interpretations of FRS 102.

Suggested Books for Further Studies

• “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
• “UK Accounting Standards: A Quick Reference Guide” by Steve Collings
• “The Vest Pocket Guide to IFRS” by Steven M. Bragg

Accounting Basics: “Statement of Income and Retained Earnings” Fundamentals Quiz

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