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Hi all.
I’m having some trouble understanding how one would deal with retained earnings from the previous period.
In chapter 3, example 1 of the lecture notes, whereabouts would one add this to the double entry if it was part of the question? Would retained earnings carried forward feature in the capital account, income statement account or some new account altogether?
I know this isn’t a part of the example but it features in another question I’m working on, where instead of using an income statement account, one must break things down into a capital account, retained earnings account and cost of sales account. At the moment I’m trying and failing to make the connection between the two.
Thanks a lot in advance if you can provide some help with this.
If it is a sole trader then the profit gets transferred to the capital account (dr income statement; cr capital account), and also the drawings get transferred to the capital account (dr capital account; cr drawings).
If it is a limited company, then the profit gets transferred to a retained earnings account (dr income statement; cr retained earnings) and the dividends get transferred to the retained earnings account (dr retained earnings; cr dividends)
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