Question

How are restrictions of retained earnings reported?

Short answer

A debit is recorded for a restriction on retained profits. A deficit is defined as a debit balance in the Retained Earnings account.

Step-by-step solution

Meaning of Retained Earnings

The amount of a company's income that isn't distributed as dividends to shareholders and is instead held aside for reinvestment is known as retained earnings (RE).

Retained earnings are reported on the balance sheet under the shareholder's equity section at the end of each accounting period. To calculate RE, first, add the beginning RE balance to the net income (or deduct it from a net loss), then subtract dividend payouts.

Reporting of Retained Earnings

Retained earnings restrictions are best mentioned in a footnote to the financial statements. This provides for a more thorough explanation of the constraint.