In Part 5 we learned that

  • every GLA has a category – possible values are income, expenditure, asset and liability.
  • every category has a type (flow or balance) that determines which financial statement the values represented by any given GLA roll up into.

Below we learn about Retained Income and how we use use this ‘special’ GLA to assist in the creation of the Balance Sheet.

#30 – Gla Categories drive Financial Statements

Lets revisit our five events from #21 – assume these are the only events encountered by our organisation :

EventDescriptionMovementJournal
EVENT‑1Sale for cashRevenue → 200 → BankRevenue (200)
Bank 200
EVENT‑2Sale on creditRevenue → 64 → CustomerRevenue (64)
Customer 64
EVENT‑3Customer pays off debtCustomer → 64 → BankCustomer (64)
Bank 64
EVENT‑4Pay electricity billBank → 13 → ElectricityBank (13)
Electricity 13
EVENT‑5Record rent owed to landlordLandlord → 900 → RentLandlord (900)
Rent 900

Here is the ledger representation which is the tabularazation of the journals raised under #21 :

ReferenceDateGLAAmountSymbol
Event-122-DEC-2018Revenue( 200 )USD
Event-122-DEC-2018Bank200USD
Event-222-DEC-2018Revenue( 64 )USD
Event-222-DEC-2018Customer64USD
Event-328-DEC-2018Customer( 60 )USD
Event-328-DEC-2018Bank60USD
Event-422-DEC-2018Bank( 13 )USD
Event-422-DEC-2018Electricity13USD
Event-522-DEC-2018Landlord( 900 )USD
Event-522-DEC-2018Rent900USD
Net : 0 

From previous tutorials, the financial report and type for each GLA is easily resolved via the GLA category – think of this as our chart of accounts:

GLAGLA CategoryGLA TypeReport
Bank => AssetBalanceBalance Sheet
Landlord => LiabilityBalanceBalance Sheet
Customer => AssetBalanceBalance Sheet
Rent => ExpenditureFlowIncome Statement
Electricity => ExpenditureFlowIncome Statement
Revenue => IncomeFlowIncome Statement

Let’s mimimic the behaviour of all accounting packages – by first applying a GLA aggregation and then sorting by type:

GLAGLA CategoryGLA TypeAmountSymbol
RevenueIncomeFlow( 264 )USD
ElectricityExpenditureFlow51USD
BankAssetBalance247USD
CustomerAssetBalance4USD
LandlordLiabilityBalance( 38 )USD
Net : 0 

From here, it is a short step to preparing the income statement and balance sheet :

Income Statement (covering all trading until today)

Income264
Expenditure51
Retained Income213

Balance Sheet (as of today)

Assets251
Liabilities38
213
 
Represented By: 
Retained Income213

#31 – Retained Income is a ‘fake’ GLA

Our balance sheet ‘balanced’ because Assets minus Liabilities [213] equates to Retained Income [213] .

But where in our chart of accounts do we find the actual GLA representing Retained Income? Good question.

We skipped its inclusion from our chart of accounts because it never participates directly in day-to-day business activities. You can confirm this by reviewing the complete set of business events , 1 through 5 under #30 above.

So here’s what happened:

  1. The Income Statement is self-evident – our report for the period ending “today”, subtracts expenditure from income resulting in the net income reporting line item.
  2. If you squint, you could turn that net income flow into a balance as of “today” and that’s exactly what we do – we take the net flow, pretend it is a balance accumulating in the previously undefined Retained Income GLA. Now our Balance Sheet balances.

Going forward, you should view Retained Income as a ‘pro-forma’ general ledger account that generally never participates in day-to-day journals. (with notable exceptions such as take on balances)

Summary

In this tutorial we learned that Retained Income is a ‘special’ general ledger account. Its use is generally confined to straddling the land of flow and balance thereby enabling the balancing of the Balance Sheet.

In the previous parts, we focused our attention on the categorisation of movements largely assuming all such movement took place in a single year. In the next part we will cover the implications of accounting movement across more than one period.

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Last modified: 25th October 2019

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