Question

Forms 1120 and 1120-S - Retained Earnings

Accepted Answer

A retained earnings (or deficit) account is a permanent (accumulated) balance sheet account that tracks an entity's net earnings that have not been paid out in the form of dividends. These net earnings are retained by the entity.

The amount of accumulated retained earnings is reduced by distributions to shareholders and transfers to additional paid-in capital for stock dividends. The balance of accumulated retained earnings may be less than zero; in this case, retained earnings may be referred to as retained deficit.

The basic formula for retained earnings is as follows:

Beginning of year retained earnings
Plus: Net income in current year OR Less: Net loss in current year
Less: Dividends to shareholders in current year

Note. While an S corporation does distribute profits to its shareholders, they are not considered dividends because that term specifically refers to profits paid out after taxes. An S corporation is not subject to corporate tax. Dividends are paid by C corporations after net income is calculated and taxed.

The net result is end-of-year retained earnings.