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Evaluating Retained Earnings: What Gets Kept Counts



The author has been reading the mailbag of Michael Finke, the head of the accounting department at a major retailer. He gets a lot of questions from readers about how companies keep the money they have earned, and ultimately retain profits. The author decided to write a post about the topic, focusing on a recent discussion with Mr. Finke about how to evaluate retained earnings.

When you invest your money, you’re not just giving someone an interest-free loan. You are making a direct contribution to the future success of your company. The amount you give up to invest is a pretty small part of the company’s total resources. However, what you get in return can be a very large part of the company’s resources. This portion is called retained earnings, and it is something that you, as the investor, want to evaluate carefully.

Home » Bookkeeping » Cost of Goods Sold Journal Entry

Aug 14, 2020
Bookkeeping by Adam Hill
How to Take a Reserve Against Your Inventory

On the other hand, failure to properly inventory a supply chain with necessary MRO items can result in production shut-downs and slow-downs, diminished product availability, and ultimately customer attrition. Inventory items at any of the three production stages can change in value. Changes in value can occur for a number of reasons including depreciation, deterioration, obsolescence, change in customer taste, increased demand, decreased market supply, and so on. An accurate inventory accounting system will keep track of these changes to inventory goods at all three production stages and adjust company asset values and the costs associated with the inventory accordingly. As such, the purpose of each seems to be that of maintaining a high level of customer service or part of an attempt to minimize overall costs.

Buffer inventory is the inventory kept or purchased for the purpose of meeting future uncertainties. Also known as safety stock, it is the amount of inventory besides the current inventory requirement. The benefit is smooth business flow and customer satisfaction and disadvantage is the carrying cost of inventory. Raw material as buffer stock is kept for achieving nonstop production and finished goods for delivering any size, any type of order by the customer. Oftentimes, firms will purchase and hold inventory that is in excess of their current need in anticipation of a possible future event.

What is the double entry for inventory?

Create a journal entry When adding a COGS journal entry, you will debit your COGS Expense account and credit your Purchases and Inventory accounts. Purchases are decreased by credits and inventory is increased by credits. You will credit your Purchases account to record the amount spent on the materials.

This process is sometimes called “smoothing” because it smoothes the peaks and valleys in demand, allowing the firm to maintain a constant level of output and a stable workforce. These goods are maintained on hand at or near a business’s location so that the firm may meet demand and fulfill its reason for existence. If the firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied if the firm does not have the required item in stock when the customer arrives.

Thus, they mistakenly assume items that have been stolen have been sold and include their cost in cost of goods sold. Raw materials of all types are initially recorded into an inventory asset account with a debit to the raw materials inventory account and a credit to the accounts payable account. The cost of raw materials on hand as of the balance sheet date appears in the balance sheet as a current asset.

Three general types of inventory control systems include continuous review systems, periodic review systems, and just-in-time inventory control. Raw materials may sometimes be declared obsolete, possibly because they are no longer used in company products, or because they have degraded while in storage, and so can no longer be used. If so, they are typically charged directly to the cost of goods sold, with an offsetting credit to the raw materials inventory account. Consolidating MRO suppliers, when possible, also makes good fiscal sense, as shaving even just a few percentage points from an MRO budget can radically improve a company’s bottom line.

Inventory is either the finished goods stored and offered for sale by a business or the raw materials used by a company to produce finished products. An inventory control system is a process businesses use to manage inventory.

If you buy $100 in raw materials to manufacture your product, you would debit your raw materials inventory and credit your accounts payable. Once that $100 of raw material is moved to the work-in-process phase, the work-in-process inventory account is debited and the raw material inventory account is credited.

Although periodic inventory procedure reduces record-keeping, it also reduces control over inventory items. Firms assume any items not included in the physical count of inventory at the end of the period have been sold.{“@context”:”https://schema.org”,”@type”:”FAQPage”,”mainEntity”:[{“@type”:”Question”,”name”:”What gets subtracted on the retained earnings statement?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” The subtraction is the amount of dividends paid out.”}},{“@type”:”Question”,”name”:”How much should you keep in retained earnings?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” The amount of retained earnings you should keep depends on your company’s size and the industry it is in.”}},{“@type”:”Question”,”name”:”How do you evaluate retained earnings?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” Retained earnings are the amount of money that a company has in its accounts at the end of a given period. Retained earnings are calculated by subtracting all expenses from all revenues.”}}]}

Frequently Asked Questions

What gets subtracted on the retained earnings statement?

The subtraction is the amount of dividends paid out.

How much should you keep in retained earnings?

The amount of retained earnings you should keep depends on your company’s size and the industry it is in.

How do you evaluate retained earnings?

Retained earnings are the amount of money that a company has in its accounts at the end of a given period. Retained earnings are calculated by subtracting all expenses from all revenues.

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