Adjustment to retained earnings, also known as a reclassification of retained earnings, refers to an accounting process that identifies certain components of the business’ balance sheet that are currently listed as assets or liabilities and requires that they be moved and recorded in the retained earnings section instead. This affected line item can come from anywhere – for example, interest earned on investments or money paid out for dividends.

At the end of each financial reporting cycle, companies compare their balance sheet’s net profit or loss to their retained earnings amount and make necessary adjustments if there are discrepancies. These adjustments ensure that the reported profits or losses accurately reflect the financial performance of the business and help create a more reliable picture of its financial health.