LONG TERM FINANCE

OWNED FUNDS BORROWED FUNDS

SHARES
RETAINED EARNINGS

RETAINED PROFITS OR PLOUGHING-BACK OF PROFITS





In accounting, Retained Earnings refers to the
portion of net income which is retained by the corporation
rather than distributed to its owners as dividends.

Similarly, if the corporation takes a loss, then that loss is
retained and called variously retained losses, accumulated
losses or accumulated deficit.





Ploughing back of profits is also known as self-
financing because it is an internal source of finance. It is
just like individuals saving a part of their current earnings to
meet future requirements.

Retained earnings are reported in the shareholders' equity
section of the balance sheet. Companies with net
accumulated losses may refer to negative shareholders'
equity as a shareholders' deficit.



A complete report of the retained earnings or retained losses
is presented in the Statement of Retained Earnings or
Statement of Retained Losses.

The calculation is:
+ Beginning retained earnings
+ Net income during the period
- Dividends paid
= Ending retained earnings

The retained earnings formula is also known as the retained
earnings equation


Example

For e.g., ABC International has Rs.5,00,000 of net profits
in its current year, pays out Rs.1,50,000 for dividends, and
has a beginning retained earnings balance of Rs.12,00,000.

Its retained earnings calculation is:
+ $12,00,000 Beginning retained earnings
+ $5,00,000 Net income
- $1,50,000 Dividends
= $15,50,000 Ending retained earnings
ADVANTAGES

TO THE COMPANY

Economical
Efficiency and productivity
Confidence of shareholders
Enhances creditworthiness
Less financial risk
Repayments of debentures and term loans
Used to meet working capital needs

TO THE SHAREHOLDERS

Appreciation in share values
Bonus shares
Regular dividends
Security value

TO THE SOCIETY

Increases capital formation
Helps speedy development
Benefits to the consumers
Social welfare activities
DISADVANTAGES

1. Huge amount of internally generated funds lead to
manipulation in the value of shares.

2. It may result in over- capitalisation.

3. Management may misuse this huge accumulated profits.

4. Huge sums of retained earnings or surplus encourages
the company for over investment and ambitious
expansion programmes.