Use of retained earnings account in sap

[Explain with example]

Let's first understand what is retained earnings account.

Lets first understand what is retained earning account
Company prepares its profit & loss statement by taking into account all the revenues and expenses.

Consider below example, company is operating since 5 years.

Opening retained earning= beginning retained earnings + net income - dividend

The current years retained earnings amount from profit & loss statement is taken to next years balance sheet
on the liability side.
Now you understand the concept of retained earnings, so the next question is how is retained earnings handled
in sap.

How retained earnings are handled in sap?

A GL master for retained earnings is created and declared as retained earnings account using T code: OB53.
Since retained earnings is part of shareholders equity which comes under balance sheet. Hence GL master of
retained earnings account is created with account type balance sheet.
This retained earnings account is assigned to each and every profit & loss account.

[As per standard practice single retained earnings account is used in a company code. In such cases, once a
retained earning account is declared in OB53 then sap by default assigns this retained earnings account to each
and every profit & loss GL account.
But in rare cases when more than one retained earnings account is created and declared in OB53, then while
creating GL master for profit & lose account one has to choose retained earnings account manually.]

At the end of year, balance carry forward program (FAGLGVTR) is executed to move balances to the
next year.

Year-end balance of profit & loss account

1. Balance in profit & loss accounts is carried to next year using retained earnings (RE) account.
2. Balance amount is carried forward in local currency.
3. Retained earning amount is carried forward without any account assignment like cost center, profit
center, internal order or WBS.

Year-end balance of balance sheet account

1. Year-end balance of balance sheet accounts, customer, and vendor is carried forward using the same
GL account.
2. Balance sheet balance is carried forward with account assignment.

Note: No accounting document is posted when year end carry forward program is execucted. Balances are
simply moved to next year without any document getting posted.

Lets understand the use of retained earnings account with example:

In below example, GL account 10101 is retained earnings (RE) account which is assigned to every profit &
loss account.
At year end, profit & loss balance is carried forward using retained earnings account 10101.
Net amount in 10101 is retained earnings amount. Portion of retained earnings amount can be distributed as
dividend or entire retained earnings amount can be capitalized (taken to next year balance sheet under
liability).

When company declares dividend below accounting entry is posted:

When dividend is actually paid by the company, below accounting entry is posted

Note: Dividend is a balance sheet item.