If you are closing out a company how would you handle retained earnings?
Example: If I opened a company with my own cash for $1,000.00.
I know the entry would be:
$1,000.00 DB to cash
$1,000.00 CR to Retained Earnings
If I used the $1,000.00 cash to pay bills and then had no money left and closed the business.
Would the following be my closing entry for retained earnings:
$1,000.00 DB to close out retained earnings
$1,000.00 CR to the income summary to close business
To handle retained earnings when closing out a company, you would follow a few steps. But before we get into that, let's first explain what retained earnings are.
Retained earnings represent the accumulated profits or losses of a company that are not distributed to the owners (shareholders or partners) as dividends. It is essentially the accumulated portion of net income that the company has retained for reinvestment in its operations.
Now, let's move on to the steps to handle retained earnings when closing out a company.
1. Determine the closing balance of retained earnings: Calculate the total amount of retained earnings at the time of closing. This can be done by summarizing the net income or loss for the entire period the business was operational, subtracting any dividends distributed, and adjusting for any changes in accounting policies.
2. Determine the final entry for retained earnings: In your example, if you used the $1,000.00 cash to pay bills and have no money left, your final entry for retained earnings would be:
$1,000.00 debit (DB) to close out retained earnings
$1,000.00 credit (CR) to the income summary to close the business
This entry transfers the balance of retained earnings to the income summary account, which is a temporary holding account used to close out the revenues and expenses of the business.
3. Close out the income summary account: After the closing entry for retained earnings is made, the balance of the income summary account should be transferred to the capital account or the appropriate equity account. If you are the sole owner of the business, the amount would typically be transferred to your own capital account.
It's worth noting that the specific steps and accounts involved in closing out a company's financial records may vary depending on the accounting method used and any legal or regulatory requirements in your jurisdiction. Therefore, it is always advisable to consult with a professional accountant or tax advisor when closing out a company to ensure compliance with applicable rules and regulations.
I hope this explanation helps you understand how to handle retained earnings when closing out a company. If you have any further questions, feel free to ask!