Statement of retained earnings

Definition of the Statement of Retained Earnings

The statement of retained earnings reconciles changes in the retained earnings account during a reporting period. The statement begins with the beginning balance in the retained earnings account, and then adds or subtracts such items as profits and dividend payments to arrive at the ending retained earnings balance. The general calculation structure of the statement is:

Beginning retained earnings + Net income - Dividends = Ending retained earnings

The statement of retained earnings is most commonly presented as a separate statement, but can also be appended to the bottom of another financial statement.

Example of the Statement of Retained Earnings

The following example shows the most simplified version of a statement of retained earnings:

 Arnold Construction Company
Statement of Retained Earnings
for the year ended 12/31x2

Retained earnings at December 31, 20X1 $150,000
Net income for the year ended December 31, 20X2 40,000
Dividends paid to shareholders -25,000
Retained earnings at December 31, 20X2 $165,000

It is also possible to provide a greatly expanded version of the statement of retained earnings that discloses the various elements of retained earnings. For example, it could separately identify the par value of common stock, additional paid-in capital, retained earnings, and treasury stock, with all of these elements then rolling up into the totals just noted in the last example. Here is a sample of a more expanded statement of retained earnings:

Arnold Construction Company
Statement of Retained Earnings
for the year ended 12/31x2

 
Common Stock,
$1 Par

Additional Paid-In
Capital

Retained
Earnings
Total
Shareholders’
Equity
Retained earnings at December 31, 20X1 $10,000 $40,000 $100,000 $150,000
Net income for the year ended December 31, 20X2     40,000 40,000
Dividends paid to shareholders     -25,000 -25,000
Retained earnings at December 31, 20X2 $10,000 $40,000 $115,000 $165,000

The statement is most commonly used when issuing financial statements to entities outside of a business, such as investors and lenders. When financial statements are developed strictly for internal use, this statement is usually not included, on the grounds that it is not needed from an operational perspective.

Similar Terms

The statement of retained earnings is also known as the retained earnings statement, the statement of shareholders' equity, the statement of owners' equity, and the equity statement.