What is a statement of retained earnings?

The statement of retained earnings is the second financial statement that must be prepared. It is prepared right after the income statement and before the balance sheet. In the United States, it is required by the Generally Accepted Accounting Principles whenever any comparative balance sheets and income statements are presented. It may appear in the balance sheet or in a combined income statement and changes in retained earnings statement, or as a separate schedule.

What is the purpose of the statement of retained earnings?

The statement of retained earnings explains the changes in retained earnings from net income or losses and from any dividends over a period of time. In short, the statement of retained earnings reports the change in retained earnings from the beginning to the end of the time period and this usually consists of one year.

What is retained earnings?

Retained earnings is ultimately part of equity. Let’s start by reviewing stockholders’ equity. Stockholders equity is the owners claims on the corporations or businesses and it consists of two parts: common stock and retained earnings. As mentioned before, the statement of retained earnings reports specifically on the changes in retained earnings.

The retained earnings of a company is the income that’s not distributed to shareholders, To simplify it, think of it as he company’s piggy bank and the money left after all the expenses, is left there. Retained earnings is increased by the net income or decreased by the net loss and decreased again by dividends.

Here is a simplified formula to calculate retained earnings:

Retained earnings = Beginning Retained Earnings + Net Income – Dividends

What are the basic elements of a statement of retained earnings?

  • Beginning balance of retained earnings.
  • Corrections for prior errors with the related tax effect.
  • Net income.
  • Dividends of withdrawals by the owner if there are any.

Example of how the statement of retained earnings?

The statement of retained income must be drawn up for a business called XYZ Trading.

Step 1 – Record the statements heading

Please note that the heading includes the name of the company, XYZ Trading, the name of the statement and the time period for the year ending December 31, 2014. The statement of retained earnings always represents a period of time which is exactly why the statement of retained earnings includes for the wording year or month ending.

Step 2 – List Beginning Retained Earnings

Beginning retained earnings is equal to ending retained earnings of the previous year. This means that the retained earnings at December 31, 2013 is the retained earnings for January 1, 2014. It is also perfectly fine for beginning retained earnings to equal zero. That only means that the company is either brand new or the retained earnings balance is zero.

Step 3 – Add Net Income or Subtract Net Loss

In this step, we either add net income or subtract net loss from the beginning retained earnings number. The question you’re probably asking is “where does net income or loss come from?” It is found on the Income Statement, which is prepared before the statement of retained earnings.

Step 4

Subtract dividends. Dividends represent payments or distributions to owners and decrease retained earnings.

Step 5

Calculate the ending retained earnings.

Summary of steps

    1. Prepare the heading.
    2. Start with the beginning retained earnings.
    3. Add the net income or subtract the net loss.
    4. Subtract dividends.
    5. Determine the ending retained earnings