Are Retained Earnings on the Income Statement?

Financial statements provide a view into a company’s financial health. They offer stakeholders essential information for decision-making. A common point of confusion involves the location of accounts like retained earnings within these documents. This article clarifies the placement of retained earnings, distinguishing it from other core financial statements.

Understanding the Income Statement

The income statement details a company’s financial performance over a specific period, such as a quarter or fiscal year. Its primary purpose is to show the profit or loss a business generated. It is often called a profit and loss (P&L) statement due to its focus on profitability.

Key components of the income statement include revenues (money earned from sales) and expenses (costs incurred to generate revenue). The statement also accounts for gains and losses from non-operating activities. By subtracting expenses and losses from revenues and gains, the income statement arrives at the net income or net loss for the period.

Understanding Retained Earnings

Retained earnings represent the cumulative net income held onto over time, rather than distributed to shareholders as dividends. This reflects accumulated past profits the business has reinvested or saved. It is a running total of profits less any distributed dividends since inception, not just profit from a single period.

Retained earnings are calculated by taking the beginning balance from the prior period. Net income (or net loss) from the current period is added, and any dividends paid to shareholders are subtracted. This results in the ending balance, which carries forward to the next period.

Placement of Retained Earnings

Retained earnings are not presented on the income statement; instead, they are displayed on the balance sheet, within the equity section. The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a point in time. Equity represents the owners’ residual claim on assets after liabilities are settled, and retained earnings are a significant component.

Net income calculated on the income statement for a period directly impacts the retained earnings balance. Net income flows into the retained earnings calculation, increasing the balance if a profit, or decreasing if a loss. Any dividends paid during the period also reduce the retained earnings balance.

This connection is often detailed in a separate financial statement, such as the Statement of Retained Earnings or the Statement of Changes in Equity. These statements reconcile the beginning and ending balances of retained earnings by showing the impact of net income and dividends.