What are retained earnings and comprehensive income?

Retained earnings reports the sum of a company’s net income since its founding less all amounts distributed in the form of dividends and transfers to the paid-in capital accounts, which equals the amount kept in the firm.  As with all profits, earnings that are retained are taxed at the Commercial level when recognized.  When net income is recognized, revenues have exceeded the expenses to produce those earnings.  If assets have increased without an increase in liabilities or paid-in capital, retained earnings must have grown and equity must have also increased.

Appropriated retained earnings are an amount of retained earnings in the balance sheet that is segregated for a specific purpose and reported separately to inform shareholders of the amount appropriated for funding needs.  A company that undertakes a special project (e.g., building a plant) may be required by a major creditor to limit dividend payments until the project is completed or simply in order to conserve cash for expansion.

Comprehensive income is all income and expenses recognized during an accounting period as a result of all changes in equity except those due to investments by owners (capital increase) and distributions to owners (dividends).  Comprehensive income includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit.  The difference between net income reported in the income statement and comprehensive income is other comprehensive income (OCI).  OCI includes unrealized gains and losses on available for sale securities, gains and losses on derivatives held as cash flow hedges, gains and losses due to translating the financial statements of foreign subsidiaries, actuarial gains and losses on defined benefit plans recognized, and changes in revaluation surplus.

Accumulated other comprehensive income is shown as a separate line item in shareholders’ equity that reports the accounting entity’s cumulative income that has not been reported as part of net income in the income statement.  Revaluation surplus represents amounts credited due to the increase in the carrying value of an asset.