How to Make a Statement of Retained Earnings

Retained earnings are the cumulative net earnings a company keeps after distributing profits to its shareholders as dividends. The Statement of Retained Earnings illustrates how these accumulated profits change over a specific period, showing if they are reinvested into the business or paid out to owners. It helps users understand a company’s financial position and its approach to growth and shareholder returns.

Understanding the Core Elements

Preparing a Statement of Retained Earnings requires specific financial figures from other reports. The starting point is the beginning retained earnings balance, representing accumulated profits from prior periods not yet distributed. This figure is found on the prior period’s balance sheet under the shareholders’ equity section. It forms the foundation for current period changes.

Net income or net loss for the current period is another element. Net income is profit after all revenues, expenses, and taxes. Conversely, a net loss occurs when expenses exceed revenues. This figure comes from the company’s Income Statement.

Dividends declared or paid during the period also impact retained earnings. Dividends are distributions of a company’s earnings to its shareholders. These include cash dividends (direct cash outflow) and stock dividends (reallocating retained earnings to other equity accounts without cash outflow). Dividend information is found in internal financial records and reduces the retained earnings balance.

Constructing the Statement

The Statement of Retained Earnings follows a straightforward formula that reconciles beginning and ending balances. The calculation is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This equation tracks the flow of earnings into and out of the company’s accumulated profits.

To prepare the statement, begin by titling the document with the company’s legal name, “Statement of Retained Earnings,” and the reporting period, such as “For the Period Ended [Date].” The initial line item displays the beginning retained earnings balance for the period. For instance, if a company had $100,000 in retained earnings at the start of the year, that amount is listed first.

Next, the net income for the period is added to the beginning balance. If the company incurred a net loss, that amount is subtracted instead. For example, if the company earned a net income of $50,000, this figure is added to the $100,000.

Finally, any dividends declared or paid to shareholders during the period are subtracted. If $20,000 in dividends were paid, this amount is deducted from the running total. The resulting figure is the ending retained earnings balance, representing the accumulated earnings retained by the company at the end of the specified period.

Connecting to Other Financial Reports

The Statement of Retained Earnings acts as a bridge, linking several financial reports and providing a view of a company’s financial health. The ending retained earnings balance, calculated on this statement, flows to the equity section of the Balance Sheet. It forms a component of shareholders’ equity, reflecting the portion of cumulative profits reinvested in the business. This direct linkage ensures consistency across financial reporting.

Net income or net loss, an input to the Statement of Retained Earnings, originates from the Income Statement. The Income Statement summarizes a company’s revenues and expenses over a period to arrive at its profitability. Thus, the profit or loss generated from operations directly impacts the amount of earnings available for retention or distribution.

Dividends, which reduce retained earnings on this statement, also appear on the Statement of Cash Flows. Cash dividends paid to shareholders are reported under the financing activities section of the Statement of Cash Flows. This highlights how a company allocates its cash, either by reinvesting profits or returning them to investors. The interconnectedness of these statements provides a picture of a company’s performance, financial position, and cash movements.