Accounting System

Net income becomes retained earnings and is disposed of as profit.

2017/01/21

当期純利益が内部留保となり利益処分される流れ

The meaning of shifting the inventory at the beginning of the month and the inventory at the end of the month at the time of closing

In the settlement consolidation journal, all expense and income accounts for the current month are transferred to the profit and loss account, but there are two types of expenses that are eligible.

  1. Periodic costs that are incurred and expensed in the current month
  2. Cost of sales minus the balance of inventory at the beginning of the month and purchases at the end of the month.
    The cost of sales (cost of goods sold) is the cost of transferring the entire amount of inventory at the beginning of the month to an expense account called opening stock, and the entire amount of inventory at the end of the month to an expense account called purchasing.
  • Replaced inventory on the balance sheet (B/S) and deducted inventory at the end of the month from purchases.
    Dr. Opening stock 800  Cr. Invenotries 800
    Dr. Inventories 1000  Cr. Closing stock 1000

Instead of setting the balances in the Opening stock, Closing stock and Purchase accounts to zero and erasing them on the income statement (P/L), the difference will be the balance in the Cost of Sales account (cost of goods sold).

  • Transfer the inventory at the beginning of the month, the purchase of the current month, and the inventory at the end of the month to COGS
    Dr. COGS 800  Cr. Opening stock 800
    Dr. Closing stock 1000  Cr. COGS 1000
    Dr. COGS 400  Cr. Purchase 400

You are now ready to transfer the expense account to the profit and loss account.

Net income transferred to retained earnings is not held back as cash and deposits.

The profit and loss in P/L after the month-end accounting is reported as Net Profit in B/S, which can be distributed as a dividend or retained as retained earnings at the timing of the year-end accounting of profit.

In system accounting, P/Ls and B/Ss are created by pasting the journalized data recorded in the ledger (G/L) into a pre-prepared format, but in bookkeeping terms, all expense and income accounts for the current month are transferred to the profit and loss account.

  • All expense items are transferred to profit or loss.
    Dr. Net income 80  Cr. All Expense 80
  • All revenue items are transferred to profit or loss.
    Dr. All Revenue 100  Cr. Net income 100

Companies that are expected to grow will increase their internal reserves in order to aim for growth by reinvesting in fixed assets, such as equipment, instead of returning them to shareholders through dividends.

  • Excess balance in profit and loss account (credit side) is transferred to retained earnings.
    Dr. Net income 20  Cr. Retained earnings 20

Although net assets increase by carrying forward profits and losses as retained earnings, accounts receivable, which is the substance of revenue, will eventually be converted into cash and deposits, and the balance will decrease due to capital investment, repayment of loans, etc., and this will be done independently of the above movements in net assets.

  • Investment in equipment
    Dr. machine 5  Cr. cash (bank) 5

This is why, several years ago, there was a counterargument to the opinion that companies should release their internal reserves in order to eliminate deflation in Japan: "Internal reserves are not just cash deposits in a company.

How to dispose of profits

Net assets are listed in B/S in the form of legal capital, legal capital surplus, and retained earnings (Earned surplus).

Dividends paid to shareholders as an appropriation of retained earnings are taken from retained earnings and recorded in a liability called accrued dividends.

  • Dividends from retained earnings
    Dr. retained earnings 10  Unpaid dividends 10
    Dr. Unpaid dividends 10  cash (bank) 10