Is retained earnings and reserves the same thing?

Question

is retained earnings in balance sheet is also called as RESERVES?

Some company's balance sheet doesnt have retained earnings but only have reserves. so is this reserves equal to retained earnings?

Answer 1

There are various types of reserves, e.g. revenue reserve, capital reserve, asset revaluation reserve, foreign currency exchange reserve, etc. Retained earnings is the same as revenue reserve.

Answer 2

No.

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision.

Retained earnings (R/E) is different.  R/E is mostly simply described as "what was left over from the income statement in PREVIOUS years".

Retained earnings, therefore, are the sum of a company’s profits, after dividend payments, since the company’s inception. They are also called earned surplus, retained capital, or accumulated earnings.

Current earnings (what the company has made so far THIS fiscal year) on a balance sheet would fall into the same section as R/E, but would be listed on a separate line in the Equity section.

So, why might a company not have Retained Earnings on its balance sheet?  There are a couple of reasons...

1)  It might be the first year of operation.  Therefore, if there is no previous year, there wouldn't be any previous earnings.

2)  The company might not have any R/E.  A lot of companies "bonus out" their profit to the shareholders/owners (quite legal) and have the people pay taxes on the money instead of the company.

3)  Dividend payment to shareholders can also deplete the R/E pool.  If the company pays out its R/E to the shareholders, there might not be anything on that line in the Balance Sheet (that's not to say that R/E and Stock Reserves are the same thing...only that they are now transferred to another part of the Equity section).

Each company is different and without knowing the exact situation, it is hard to pinpoint the specific cause for the absence of R/E.

Good luck with your question.