Retained Earnings Part II

After I left the previous post, Bogart Beck, head of SL CapEx, and I had a nice discussion about RE, the Balance Sheet, and how things are supposed to be set up. Both approaches have their merits, but I wanted to explain his side of the story (as best I can), and show why the financial templates were set up as they were. (Note to Bo: If you were to post a current financial reporting template somewhere on CapEx, that would be much appreciated!)

In my previous post, I explained that

RE(t) = RE(t-1) + NI(t) - Div(t)

Which is still true, and it's how I learned it in my first accounting class. I believe this is also GAAP-compliant. Bogart, however, wanted to make it a little easier for the average investor to be able to "follow the money" through the financial statements from month to month, and in so doing, rather confused those who were more familiar with the previously stated method.

For SL CapEx, Bogart was trying to set up a system where the RE reported on the Income Statement was directly carried over to the Balance Sheet, and what was formerly in the place of the RE on the Balance Sheet was transferred to some other account, say Capital Surplus. So, at the end of the month, here's what the (simplified) journal would look like:

Account..................................DR....................CR

Retained Earnings................RE(t-1)...........................
Capital Surplus...............................................RE(t-1)

Net Income...........................NI(t)..................................
Dividends..............................Div(t)................................
Retained Earnings...................................RE(t) = NI(t) - Div(t)

This way, an investor can look and see how the Income Statement carries through to the Balance Sheet.

However, Bogart has confirmed (I believe) that the GAAP method is acceptable as well. At least, he hasn't stopped me from using it on SLR's finances, yet. I will continue using the GAAP method, as it is the one I understand best.