How to Make a Retained Earnings Statement

A retained earnings statement outlines changes in a company’s accumulated profits over a specific period. This financial report illustrates how a business utilizes its earnings, whether by reinvesting them back into operations or distributing them to shareholders as dividends. It provides insight into a company’s financial health and its strategy for managing profits. The statement is an integral part of a complete set of financial statements, offering a bridge between a company’s profitability and its equity position.

Components of the Retained Earnings Statement

Preparing a retained earnings statement requires understanding its core components. The starting point for this statement is the beginning retained earnings balance, which represents the accumulated profits from all prior accounting periods not yet distributed as dividends. This figure is carried over directly from the end of the previous reporting period.

Another crucial component is net income or net loss, which is derived directly from the company’s income statement for the current period. Net income increases the retained earnings balance, indicating profitable operations. Conversely, a net loss reduces retained earnings.

Dividends declared represent distributions of a company’s earnings to its shareholders. These distributions decrease the retained earnings balance. Dividends can be paid in various forms, such as cash dividends or stock dividends, and their declaration by the board of directors directly impacts the amount of earnings available for retention.

Calculating the Retained Earnings Statement

The calculation of the retained earnings statement follows a straightforward formula. The process begins with the retained earnings balance from the start of the accounting period. This initial figure sets the baseline for the current period’s changes.

Next, the net income for the current period is added to this beginning balance. If the company experienced a net loss, that amount would be subtracted instead. Finally, any dividends declared during the period are subtracted from the updated balance.

The resulting figure is the ending retained earnings balance, which represents the total accumulated profits at the close of the period. For instance, if a company began with $50,000 in retained earnings, earned $20,000 in net income, and declared $5,000 in dividends, its ending retained earnings would be $65,000.

Formatting the Retained Earnings Statement

The retained earnings statement adheres to a standard format to ensure clarity and consistency in financial reporting. The statement typically begins with a clear title, including the company’s name, followed by “Statement of Retained Earnings,” and specifies the accounting period it covers, such as “For the Year Ended December 31, 2024.” This precise heading ensures the reader immediately understands the document’s purpose and timeframe.

Within the body of the statement, each financial component is listed with appropriate labels. The beginning retained earnings balance is presented first, often labeled as “Retained Earnings, Beginning Balance.” Subsequent lines detail the additions and subtractions, such as “Add: Net Income” or “Less: Dividends Declared.” The final line item presents the “Retained Earnings, Ending Balance.” Proper formatting also includes the consistent use of currency symbols, such as the dollar sign, and alignment of numerical values to maintain readability.

Role in Financial Reporting

The retained earnings statement plays an integral role within a company’s complete set of financial statements, demonstrating the interconnectedness of these reports. The ending retained earnings balance calculated on this statement directly flows to the equity section of the balance sheet. This direct link ensures that the balance sheet accurately reflects the portion of a company’s equity that has been accumulated from past profits and not distributed to shareholders.

The retained earnings statement also connects the income statement to the balance sheet through the inclusion of net income or net loss. The net income figure, which represents a company’s profitability over a period, is transferred from the income statement to the retained earnings statement. This integration shows how current period earnings directly impact the accumulated profits available to the business. The statement thus provides a clear narrative of how a company’s profitability contributes to its overall equity over time, offering insights into its financial management and growth.