How to Prepare a Retained Earnings Statement

The retained earnings statement shows how a company’s profits have been managed over a specific period. It details the portion of earnings a business has kept for reinvestment rather than distributing to shareholders. This statement is an important financial report. This article guides you through preparing a retained earnings statement, outlining the necessary information, assembly steps, and its utilization.

Understanding the Retained Earnings Statement

A retained earnings statement illustrates changes in a company’s accumulated profits over a defined accounting period. These are earnings not distributed to shareholders as dividends but kept within the business. The statement serves as a bridge, connecting the financial performance shown on the income statement with the financial position presented on the balance sheet.

Net income or loss from the income statement directly impacts retained earnings, representing the period’s profitability. The ending balance of retained earnings then flows into the equity section of the balance sheet, providing a view of how earnings are retained and reinvested. This connection highlights the statement’s role in showing a company’s strategy for utilizing its profits.

Essential Information for Preparation

Before assembling the retained earnings statement, specific financial figures must be gathered. These figures serve as the foundational data for calculating changes in retained earnings. The statement covers a specific period, such as a month, quarter, or year.

The first piece of information needed is the beginning retained earnings balance. This figure represents the accumulated retained earnings from all prior periods and is found on the balance sheet from the end of the previous accounting period. It acts as the starting point for tracking changes during the current reporting cycle.

The next component is the net income or net loss for the current period. This amount is derived from the company’s income statement. Net income increases retained earnings, while a net loss decreases them, reflecting the business’s profitability or unprofitability during the period.

Finally, any dividends declared or paid to shareholders during the period must be identified. Dividends are distributions of a company’s earnings to its owners and reduce retained earnings. Information regarding dividends is found in company records.

Assembling the Retained Earnings Statement

With the necessary information collected, the retained earnings statement can be constructed. The statement begins with the opening balance of retained earnings for the reporting period. This starting figure establishes the baseline for the calculation.

To this beginning balance, the net income for the current period is added. If the company experienced a net loss, this amount is subtracted from the beginning retained earnings. This step incorporates the period’s financial performance into the accumulated earnings.

After adding net income (or subtracting net loss), the total amount of dividends paid to shareholders during the period is deducted. Dividends represent a distribution of earnings, reducing the funds retained by the business. The final calculation yields the ending retained earnings balance for the period.

Finalizing and Utilizing the Statement

Once assembled, the retained earnings statement should be presented with a clear title, indicating the company name and the specific accounting period it covers. This ensures transparency and easy identification. The final ending retained earnings figure from this statement holds importance.

This ending balance is then reported in the shareholders’ equity section of the company’s balance sheet. This link ensures the balance sheet accurately reflects the cumulative earnings retained by the business. The retained earnings statement connects a company’s core financial reports, providing a view of its financial position and profitability over time.