¾ Retained earnings comprise the cumulative total since incorporation of net income
(less losses) less any declared dividends. The balance in retained earnings is part of
represent a claim on any specific asset. A debit balance in the retained earnings is
identified as a deficit.
Retained Earnings Restrictions
¾ These are a portion of the balance unavailable for dividends. Restrictions generally
are of one or more of the following types: Contractual restrictions (long-term debt)
and Voluntary restrictions (the board of directors may voluntarily create restrictions).
Retained earnings restrictions are generally disclosed in the notes to the financial
Prior Period Adjustments
¾ A prior period adjustment occurs when correcting an error related to a prior period,
and when changing an accounting principle. When a correction of an error or a
change in accounting principle results, the accounting principle treatment is similar: