Statement of retained earnings definition
/What is the Statement of Retained Earnings?
The statement of retained earnings reconciles changes in the retained earnings account during a reporting period. It is useful for understanding how management utilizes the profits generated by a business. 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 shown below:
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.
How to Prepare a Statement of Retained Earnings
Most organizations are content to only report retained earnings within the equity section of the balance sheet. If so, and you are using accounting software, then just print the standard balance sheet report. You can achieve the same result with a manual accounting system by preparing the balance sheet from the trial balance report. If you want to break out retained earnings into a separate report, this typically involves a manual preparation that requires the following steps:
List your beginning retained earnings figure in the top row of the statement.
State your current net income figure in the second row of the statement.
List a deduction for dividends paid in the third row of the statement.
Net the preceding line items into an ending retained earnings figure in the fourth row of the statement.
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The Interpretation of Financial Statements
Advantages of the Statement of Retained Earnings
A key advantage of the statement of retained earnings is that it shows how management chooses to redirect the retained earnings of a business. It may indicate that funds are being allocated to the acquisition of more assets, or perhaps sent to investors in the form of dividend payments or stock repurchases. Thus, it can provide a general indication of how management wants to use excess funds.
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.
Terms Similar to the Statement of Retained Earnings
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.