When to break apart

Whenever a single account involves multiple activities, break it apart!

A primary example of this is the Retained Earnings account... because it holds both Net Income & Dividends!

Imagine that in this scenario, we have the following values for Net Income & Dividends:

  • Net Income: $1,000
  • Dividends: $500

This would result in a Retained Earnings amount of $1,000 (Net Income) - $500 (Dividends) = $500, as seen here!

To break apart Net Income & Dividends within this $500 Retained Earnings balance, let's first pull out the $1,000 of Net Income was a Source of Cash for our business...

...and then pull out the $500 of Dividends that was Used to pay our shareholders.

This is how we can break apart a single account when it involves multiple activities!