How to Prepare a Statement of Retained Earnings

The Statement of Retained Earnings is a financial document that outlines changes in a company’s accumulated earnings over a specific accounting period. These accumulated profits, known as retained earnings, are the portion of net income not distributed to shareholders as dividends but kept within the business. This statement connects a company’s income statement and balance sheet, and also shows how profits are utilized—whether reinvested for growth or distributed to owners.

Identifying Necessary Financial Data

Preparing a Statement of Retained Earnings requires specific financial figures to accurately reflect changes in a company’s accumulated profits. The necessary information is typically found across various financial statements and internal records.

The initial figure required is the beginning retained earnings balance, representing accumulated profits from all prior periods not yet distributed. This balance is located on the company’s balance sheet from the immediately preceding accounting period, usually under the shareholders’ equity section. Retained earnings are a cumulative account, so the ending balance from one period becomes the beginning balance for the next.

Next, the net income or net loss for the current accounting period is needed. This figure is directly obtained from the company’s income statement, which summarizes revenues and expenses over the specified period. If the company generated a profit, net income will increase retained earnings, while a net loss will decrease them.

Finally, any dividends declared or paid to shareholders during the current period must be identified. Dividends represent a distribution of profits to the company’s owners and reduce retained earnings. This information is tracked in the company’s general ledger or specific dividend records; it impacts the equity section of the balance sheet.

Constructing the Statement of Retained Earnings

Once all necessary financial data has been identified and collected, the construction of the Statement of Retained Earnings can begin. This statement follows a standard format to ensure clarity and adherence to generally accepted accounting principles (GAAP).

The statement typically begins with a three-line heading that includes the company’s name, the title “Statement of Retained Earnings,” and the specific accounting period covered, such as “For the Year Ended December 31, 20XX.” Following the heading, the first line item presented is the “Beginning Retained Earnings Balance” for the period.

The next step involves incorporating the company’s profitability for the period. If there was net income, it is added to the beginning retained earnings balance. Conversely, if the company incurred a net loss, this amount would be subtracted from the beginning balance. This adjusted subtotal reflects the retained earnings before any distributions to shareholders.

Finally, any dividends declared or paid to shareholders during the period are subtracted from the updated retained earnings balance. The resulting figure is the “Ending Retained Earnings Balance” for the current period, which then carries over as the beginning balance for the subsequent accounting period. Proper labeling of each component, along with clear date and currency notations, ensures a precise financial reconciliation.