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How to work out retained earnings.

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    I'm a bit confused of exactly what retained earnings consists of.

    I start with 20k.
    Say I bought £10k worth of goods.
    I sell £8k of the goods at a price of £20k, so I have £2k in inventory.
    The cost of distributing these goods is £500.
    I pay wages to people doing the sales, say £500.

    What is the retained earnings (under equity)?

    Do we include wages and the distribution cost in this and why?
    (I think we don't for COGS)
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    Work out the profit, add to opening capital, result closing capital.

    Sales 20,000

    Open Stock 0
    purchases 10,000
    Closing stock-2,000

    Cost Goods Sold 8,000

    Gross Profit 12,000
    wages - 500
    Distribution - 500
    Net Profit 11,000

    Bank open 20,000
    Sales 20,000
    Purchases -10,000
    Wages -500
    Distribution -500
    Closing 29,000

    Final Balance Sheet-Check

    Stock 2,000
    Bank 29,000
    Assets 31,000

    Opening capital 20,000
    profits 11,000
    Total 31,000

    Do T accounts or similar to work it through, every debit has a credit being the maxim.
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    (Original post by DQd)
    I'm a bit confused of exactly what retained earnings consists of.

    I start with 20k.
    Say I bought £10k worth of goods.
    I sell £8k of the goods at a price of £20k, so I have £2k in inventory.
    The cost of distributing these goods is £500.
    I pay wages to people doing the sales, say £500.

    What is the retained earnings (under equity)?

    Do we include wages and the distribution cost in this and why?
    (I think we don't for COGS)
    Retained earnings is accumulated profits.

    Assuming you have 0 REs bf, ie new business, then your RE at year end is just your profits (less dividends).

    So your profits are:

    20k Income
    (8k) CoS
    (1k) Other costs

    11k profit = Retained earnings

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