When you as an entrepreneur profits , they must then be distributed by you. This can be done in the form of a dividend distribution, in the form of reserves or to finance other expenses. If the capital is left over after the profits have been used, you can take this with you into the next financial year. This is done with the so-called profit carried forward.
What is a profit carried forward?
The term profit carried forward is understood to mean any remaining profit that remains after the implementation of the profit appropriation resolution. The profit carried forward is treated as part of equity . Profit carried forward means that this remainder of the profit is to be carried over from you to the balance sheet for the next financial year . Please note that you offset this profit carried forward with profit or loss from the following financial year. The profit carried forward takes place primarily if your company is a corporation .
How is the profit carried forward determined?
For the new financial year, the profit carried forward is always the first item. Once the annual balance sheet has been drawn up for your corporation, the dividends due are calculated. Everything that is then left of the profit comes as a profit carryforward in your balance sheet as a basis for the following financial year . The profit carried forward can, however, also be a loss. Then it is a loss carryforward.
The way to the investigation
For you as an entrepreneur, of course, the goal is to make a profit. For this reason, you have to determine the annual surplus at the end of the year or at the end of a financial year. However, there is not always a profit and it can also be a matter of determining an annual deficit. The profit from the operative business is always shown. But not everything that flows “into the cash register” can be seen as profit.
Rather, you have to finance some other expenses from this . For example, if you have shareholders in your corporation, you distribute a dividend to them. You can also use the profit carried forward as a capital reserve. It is important to know that only the amount that is actually carried forward into the following financial year is referred to as profit carryforward.
The concrete calculation
Profit carryforward / loss carryforward from the previous year
+ Withdrawal from capital reserves or retained earnings
– Allocation to reserves
Once you have calculated this, it shows you either the net profit or the net loss of your company. It is quite possible that even a positive annual result will result in a financial loss. This can happen, for example, if the reserves formed were too high. But this also means that the company’s profit has not yet been completely used up. This shows the following calculation that needs to be made.
– Recruitment to other reserves
– time expenditure
= Profit carried forward
Once the dividends have been paid out to potential shareholders and you have deducted all other additional expenses from your company’s retained earnings, you will receive the profit carried forward. This amount remains with you and will then be carried over into the next financial year.
The whole thing should be clearly illustrated using an example:
You are an entrepreneur and your company is called Motorenbau AG. Last year you generated an annual result of 50 million euros. This now has to be distributed. Before you can determine the profit carried forward, you have to offset a loss carried forward from the previous year in the amount of 5 million. In addition, you will have to build up reserves due to pending legal disputes, which are also at 5 million.
This then results in a balance sheet profit for your company of 40 million euros. The general meeting of shareholders has shown that a dividend payment of 30 million is to be made. If there are no further provisions or expenses, the profit carried forward is only 10 million euros. So you can see that you shouldn’t be fooled by the annual result.
The income statement helps you to keep track of your income and expenses over a certain period of time. It is considered the “big brother” of the income-surplus-calculation (EÜR).
What is a loss carryforward?
If the calculation shows that you made a loss instead of a profit, this loss comes as a loss carryforward like the profit carryforward as the first item in the balance sheet for the new financial year. If you add up the success of the new year, then this corresponds to the annual financial statements for the next accounting period. The loss carryforward is therefore to be seen as a component of the annual financial statements and is also the starting point again.
Accrual to the balance sheet profit
If you already take into account the whole or only partial use of your annual surplus when preparing the annual financial statements, then the profit carried forward is no longer possible. In this case, the amount remaining from the annual surplus and profit carried forward must be shown as retained earnings. In the case of a stock corporation , according to Section 158 AktG, the use of results must be taken into account when it comes to preparing the annual financial statements.
How the generated surpluses are to be used is decided by the general meeting in the case of an AG and by the shareholders’ meeting in the case of a GmbH . However, it is also possible that there is a legal requirement for this or that it is regulated by a statute. According to § 29 GmbHG, the shareholders have an existing claim to the annual surplus. This applies including the profit carried forward or, in the negative case, less the loss carried forward.
Profit carried forward for sole proprietorships
There is no profit carryforward in a sole proprietorship. As the owner of a sole proprietorship, you raise the entire equity. You run the business within the framework of and in compliance with all legal requirements. You are free in your decisions, but you are also liable for all of your business and private assets.
For this reason, you are also entitled to the entire profit generated. You only have to make sure that business and private matters are strictly and neatly separated from each other in the annual accounts. As a sole proprietorship, however, you are obliged to pay income tax on the profit . The same applies to limited partnerships .
Profits and losses are shown on the profit and loss account. This account is then closed to the equity account.
To do this, you use the following booking records:
- Closing with a profit: Profit and loss account of equity
- Closing at a loss: equity in profit and loss account
- The profit carried forward results after the profit has been used in full
- In most cases, the profit carried forward is smaller than the balance sheet profit and the annual result
- As an entrepreneur, you will take the profit carried forward with you into the next financial year